Question

Keith Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. Demand of individual products is not affected by changes in other product lines. 30% of the fixed costs are direct, and the other 70% are allocated. Results of June follow:

Sour Cream Ice Cream Yogurt Butter Total
Units sold 2,000 500 400 200 3,100
Revenue $ 10,000 $ 20,000 $ 10,000 $ 20,000 $ 60,000
Variable departmental costs 6,000 13,000 4,200 4,800 28,000
Fixed costs 5,000 2,000 3,000 7,000 17,000
Net income (loss) $ (1,000) $ 5,000 $ 2,800 $ 8,200 $ 15,000
Required:
a. Prepare an incremental analysis of the effect of dropping the sour cream product line. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).

Answer 1

Keith Inc would lose $2,500 if it drops sour cream

Step-by-step explanation:

The impact of the dropping the sour cream will examined by considering the following relevant cash flows:

Incremental analysis

Lost contribution from the sales $

(10,000 - 6000) 4,000

Savings in the direct fixed cost

(30% × 5000) (1,500)

Net loss in contribution 2,500

Keith Inc would lose $2,500 if it drops sour cream

Answer 2

There will be decrease in profit if dropping of sour cream. So that means Keith Inc would lose $4,000.00