Decision to Eliminate an Unprofitable Product
P 8. Seven months ago, Naib Publishing Company published its first book (Book N). Since then, Naib has added four more books to its product list (Books S, Q, X, and H). Management is considering proposals for three more new books, but editorial capacity limits the company to producing only seven books annually. Before deciding which of the proposed books to publish, management wants you to evaluate the performance of its existing book list. Recent revenue and cost data are as follows:
|
Naib Publishing Company Product Profit and Loss Summary For the Year Ended December 31 |
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|
Book N |
Book S |
Book Q |
Book X |
Book H |
Company Totals |
|
|
Sales |
$813,800 |
$782,000 |
$634,200 |
$944,100 |
$707,000 |
$3,881,100 |
|
Less variable costs |
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|
Materials and binding |
$325,520 |
$312,800 |
$190,260 |
$283,230 |
$212,100 |
$1,323,910 |
|
Editorial services |
71,380 |
88,200 |
73,420 |
57,205 |
80,700 |
370,905 |
|
Author royalties |
130,208 |
125,120 |
101,472 |
151,056 |
113,120 |
620,976 |
|
Sales commissions |
162,760 |
156,400 |
95,130 |
141,615 |
141,400 |
697,305 |
|
Other selling costs |
50,682 |
44,740 |
21,708 |
18,334 |
60,700 |
196,164 |
|
Total variable costs |
$740,550 |
$727,260 |
$481,990 |
$651,440 |
$608,020 |
$3,209,260 |
|
Contribution margin |
$ 73,250 |
$ 54,740 |
$152,210 |
$292,660 |
$ 98,980 |
$ 671,840 |
|
Less total fixed costs |
97,250 |
81,240 |
89,610 |
100,460 |
82,680 |
451,240 |
|
Operating income loss |
($ 24,000) |
($ 26,500) |
$ 62,600 |
$192,200 |
$ 16,300 |
$ 220,600 |
|
Direct fixed costs included |
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|
in total fixed costs above |
$ 51,200 |
$ 65,100 |
$ 49,400 |
$ 69,100 |
$ 58,800 |
$ 293,600 |
Projected data for the three proposed new books are as follows: Book P, sales, $450,000, and contribution margin, $45,000; Book T, sales, $725,000, and contribution margin, ($25,200); Book R, sales, $913,200, and contribution margin, $115,500. Projected direct fixed costs are Book P, $5,000; Book T, $6,000; Book R, $40,000.
Required
1. Analyze the performance of the five books that the company is currently publishing.
2. Should Naib Publishing Company eliminate any of its present products? If so, which one(s)?
3. Identify the new books you would use to replace those eliminated. Justify your answer.