What are the relevant costs? What would be the effect on the company\'s overall

Question

What are the relevant costs?

What would be the effect on the company's overall net operating income if product XRAY were dropped?

Should the product be dropped or kept? Why? Support your answer with at least one credible source other than your text.

Is it in the company’s best interest to close the XRAY facility? Why or why not? Be sure to explain your answer.

The Superman Corporation The Superman Corporation produces two products: XRAYTM sunglasses and NightVisionTM reading glasses. This corporation is considering dropping their XRAY sunglasses. If Superman discontinues their sunglasses, the company will close the XRAY factory in Kryptonite, Indiana. The plant, which originally cost $3.5M to build, employs 50 full time manufacturing employees and eight office workers. The factory is one of the largest employers in town, and it is unlikely that the manufacturing employees will find comparable work within 50 miles Additionally, since the plant was originally located on the outskirts of town, it was "grandfathered" in to the town's new zoning restrictions. Additionally, if the plant is closed, it cannot be sold to another manufacturing company. The land is worth about $150,000 Data from the company's annual report for last year is listed below Sales Variable Manufacturing Costs Contribution Margin Traceable Selling & Administration Expenses Product Line Segment Margin Common Fixed Costs Net Income (loss) Company $ 800,000 $ 440,000 $ 360,000 184,000 XRAY Night Vision 400,000 239,000 161,000 28,000 400,000 201,000 199,000 156,000 $ 176,000 248,000

Explanation / Answer

Sol:

1. Relevant costs: Variable Manufacturing Costs and Traceable Selling and Administration Expenses.

These costs are relevant since they change between alternatives. Common fixed costs are not relevant as they would remain unchanged regardless of the decision taken.

2. The effect of dropping XRAY: The company's overall net operating income will decrease by $ 43,000. In other words, net operating loss will increase to $ 115,000.

3. Product XRAY should not be dropped, as it makes a positive contribution towards absorbing the company's common fixed costs.

4. No, it is not in the company's best interest to close the XRAY facility. Not only will the company's overall net operating loss will increase as explained above, it will also lead to laying off a large number of employees, who are not likely to get alternate employment in the vicinity. This would negatively impact the company's reputation and goodwill.

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