Question

Garrett Company provided the following information:

Product 1 Product 2
Units Sold 10,000 20,000
Price $20 $15
Variable cost per unit $10 $10
Direct fixed cost $35,000 $75,000

Common fixed cost totaled $46,000. Garrett allocates common fixed cost to Product 1 and Product 2 on the basis of sales. If Product 2 is dropped, which of the following is true?

a. Sales will increase by $300,000.
b. Overall operating income will increase by $2,600.
c. Overall operating income will decrease by $25,000.
d. Overall operating income will not change.
e. Common fixed cost will decrease by $27,600.

Jennings Hardware Store marks up its merchandise by 30%. If a part costs $25.00, which of the following is true?

a. The price is $7.50.
b. The markup is $32.50.
c. The price is $32.50.
d. The markup is pure profit.
e. All of these choices are correct.

Answer 1

Overall operating profit will decrease by $25,000

Price is $32.5

Step-by-step explanation:

A product should be shut down if doing so would make the savings in fixed costs associated with the product to exceed the lost contribution. Other wise , the product should remain.

In a shut down decision , the following relevant cash flows should be considered:

1. Lost contribution from the product to be shut down

2. Savings in fixed directly attributable to the product under consideration.

$

Lost contribution from products 2

(15-10)× 20,000 (100,000)

Savings in direct fixed cos 75,000

Net loss from the drop of product 2 (25,000)

Overall operating profit will decrease by $25,000

Mark up is the proportion of cost as profit

Price = cost + (mark-up %× cost

Price = 25 + (30%× 25) = 32.5

Price is $32.5