(Keep or Drop a Product Line) Travesty Stores are considering deleting its porcelain product due to losses being experienced. Travesty’s summary profit report shows the following:
|
Cutlery |
Glassware |
Porcelain |
Total |
|
|
Sales |
$30,000 |
$35,000 |
$10,000 |
$75,000 |
|
Variable costs |
15,000 |
20,000 |
7,000 |
42,000 |
|
Avoidable product-related fixed costs |
5,000 |
7,500 |
2,500 |
15,000 |
|
Allocated corporate fixed costs |
5,000 |
5,833 |
1,667 |
12,500 |
|
Operating profit |
S 5,000 |
$ (1,667) |
S(1,167) |
$ 5,500 |
- What allocation basis is the company using to allocate the corporate fixed costs?
- What is the effect on Travesty’s operating profit if it drops the porcelain product line?
- If the allocated corporate fixed costs could be decreased by 25% overall, would this change the decision in (a)? Show calculations.