? western Ho makes oil and gas well equipment The oompany has been obaH experien

Question

? western Ho makes oil and gas well equipment The oompany has been obaH experiencing losses on its mud pump prodact line for several years The most i recent quarterly income statement for the mud pump product line is given below ird Western Ho, LLC Income Statement-Mud Pump For Quarter Ended 9/30 $850,000 Sales Less Variable Costs: Variable manufacturing costs Sales commissions $330,000 42,000 Shipping Total Variable costs 390.000 460,000 Contribution Margin Less Fixed Costs: Advertising Equipment depreciation (no retail value) General factory overhead" Salary of product line manager Insurance on inventory Purchasing Department expense* 270.000 80,000 105,000 32,000 8,000 Total Fixed costs 540.000 St 80,000 Net Loss "Common costs allocated on the basis of machine hours ""Common costs allocated on the basis of sales dollars of the mud pump line would not affect sales of other product The d lines, and would have no noticeable effect on the company's total general factory overhead or total Purchasing Department expense. Would you recommend that the mud pump line be discontinued? Support your answer by showing your work.

Explanation / Answer

If Mud pump Line is discountinued ,There will be no sales revenue and variable cost and thus No contribution .However some of the fixed cost will continue to be incurred as they are not directly related to production of Mud Pump and thus unavoidable

Net Loss If product line discontinued : (230000)

Since With discontinuance , Loss has increased from 80000 to 230000 ,Mud Pump line should not be discontinued.

Fixed cost Advertising 0 Equipment depreciation 80000 General factory 105000 salary of product line manager 0 (avoidable_) Insurance 0 (avoidable) Purchasing department 45000 Total fixed cost that will be incurred even if Mud pum is discontinued 230000

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