(Product line) Johnson Metal Products produces three products: wire, tubing, and sheet metal. The company is currently contemplating the elimination of the tubing product line because it is showing a pretax loss. An annual income statement follows:
|
Sheet |
||||
|
Wire |
Tubing |
Metal |
Total |
|
|
Sales |
$ 2,200 |
$ 1,600 |
$ 1,800 |
$ 5,600 |
|
Cost of sales |
(1,400) |
(1,000) |
(1,080) |
(3,480) |
|
Gross margin |
$ 800 |
$ 600 |
$ 720 |
$ 2,120 |
|
Avoidable fixed and variable costs |
$ 630 |
$ 725 |
$ 520 |
$ 1,875 |
|
Allocated fixed costs |
90 |
80 |
105 |
275 |
|
Total fixed costs |
$ 720 |
$ 805 |
$ 625 |
$ 2,150 |
|
Operating profit |
$ 80 |
$ (205) |
$ 95 |
$ (30) |
a. Should corporate management drop the tubing product line? Support your answer with appropriate schedules.
b. How would the pretax profit of the company be affected by the decision?