Apex Industries operates five product lines, with Product Line D showing consistent losses. Management has gathered the following information for the annual keep-or-drop decision: Line D sales $1,200,000, variable cost ratio 65%, direct fixed costs $300,000, allocated fixed costs $180,000, and unavoidable costs $80,000 if the line is dropped. The production capacity freed by dropping Line D could be used to expand Line A, which would generate additional sales of $800,000 with a 45% contribution margin ratio. However, expanding Line A would require additional fixed costs of $150,000. What should management decide? Answer: Drop Line D because the opportunity to expand Line A provides greater benefit
Line D contribution margin = $1,200,000 × (1 - 0.65) = $420,000. Net benefit from Line D = $420,000 - $300,000 = $120,000 (allocated costs are irrelevant). If dropped, unavoidable costs = $80,000. Net cost of dropping Line D = $120,000 + $80,000 = $200,000. Line A expansion benefit = $800,000 × 0.45 - $150,000 = $360,000 - $150,000 = $210,000. Since Line A expansion benefit ($210,000) exceeds the cost of dropping Line D ($200,000), management should drop Line D. Net advantage = $210,000 - $200,000 = $10,000, but the primary driver is that Line A provides greater benefit. Choice A ignores the opportunity cost. Choice C miscalculates the net benefit comparison. Choice D focuses on accounting loss rather than relevant analysis.
What is the total financial benefit or cost to Harmony Manufacturing in the first year if the Winds Division is eliminated? Answer: $40,000 benefit considering all relevant factors including rent shifts
Lost contribution margin = $2,800,000 - $1,960,000 = $840,000. Eliminated division-specific fixed costs = $650,000. One-time asset sale proceeds = $450,000. Additional rent burden to Strings Division = $200,000. Net first-year impact: -$840,000 (lost contribution) + $650,000 (saved fixed costs) + $450,000 (asset sale) - $200,000 (rent shift) = $60,000 benefit. Allocated corporate overhead will be redistributed but doesn't affect total company costs. Choice A ignores rent reallocation. Choice B doesn't include asset sale value. Choice D ignores lost contribution margin.
