Lamothe Kitchen and Bath makes products for the home, which it sells through major retailers and remodeling (do-it-yourself, or DIY) outlets. One product that has had varying success is a ceiling fan for the kitchen. The fan comes in three sizes (36-Inch, 44-Inch, and 54-Inch), which are designed for various kitchen sizes and cooling requirements. The chief financial officer (CFO) at Lamothe has been looking at the segmented income statement for the fan and is concerned about the results for the 36-inch model. 36 Inch 44 Inch 54 Inch Revenues $ 374,100 $ 576,500 $ 354,300 Variable costs 232,600 286,680 164,500 Fixed costs allocated to products 148,230 226,464 139,806 Operating profit (loss) $ (6,730) $ 63,356 $ 49,994 If the 36-Inch model is dropped, the revenue associated with it would be lost and the related variable costs saved. In addition, the company’s total fixed costs would be reduced by 25 percent. Required: a. Prepare a differential cost schedule to support your recommendation. b. Should Lamothe Kitchen and Bath should drop the 36-Inch model product line?
Lamothe Kitchen and Bath makes products for the home, which it sells through major retailers and remodeling (do-it-yourself, or DIY) outlets. One product that has had varying success is a ceiling fan for the kitchen. The fan comes in three sizes (36-Inch, 44-Inch, and 54-Inch), which are designed for various kitchen sizes and cooling requirements. The chief financial officer (CFO) at Lamothe has been looking at the segmented income statement for the fan and is concerned about the results for the 36-inch model. 36 Inch 44 Inch 54 Inch Revenues $ 374,100 $ 576,500 $ 354,300 Variable costs 232,600 286,680 164,500 Fixed costs allocated to products 148,230 226,464 139,806 Operating profit (loss) $ (6,730) $ 63,356 $ 49,994 If the 36-Inch model is dropped, the revenue associated with it would be lost and the related variable costs saved. In addition, the company’s total fixed costs would be reduced by 25 percent. Required: a. Prepare a differential cost schedule to support your recommendation. b. Should Lamothe Kitchen and Bath should drop the 36-Inch model product line?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Exercise 4-44 (Algo) Dropping Product Lines (LO 4-4)
Lamothe Kitchen and Bath makes products for the home, which it sells through major retailers and remodeling (do-it-yourself, or DIY) outlets. One product that has had varying success is a ceiling fan for the kitchen. The fan comes in three sizes (36-Inch, 44-Inch, and 54-Inch), which are designed for various kitchen sizes and cooling requirements. The chief financial officer (CFO) at Lamothe has been looking at the segmented income statement for the fan and is concerned about the results for the 36-inch model.
| 36 Inch | 44 Inch | 54 Inch | |
|---|---|---|---|
| Revenues | $ 374,100 | $ 576,500 | $ 354,300 |
| Variable costs | 232,600 | 286,680 | 164,500 |
| Fixed costs allocated to products | 148,230 | 226,464 | 139,806 |
| Operating |
$ (6,730) | $ 63,356 | $ 49,994 |
If the 36-Inch model is dropped, the revenue associated with it would be lost and the related variable costs saved. In addition, the company’s total fixed costs would be reduced by 25 percent.
Required:
a. Prepare a differential cost schedule to support your recommendation.
b. Should Lamothe Kitchen and Bath should drop the 36-Inch model product line?
Transcribed Image Text:Exercise 4-44 (Algo) Dropping Product Lines (LO 4-4)
Lamothe Kitchen and Bath makes products for the home, which it sells through major retailers and remodeling (do-it-yourself, or DIY)
outlets. One product that has had varying success is a ceiling fan for the kitchen. The fan comes in three sizes (36-Inch, 44-Inch, and
54-Inch), which are designed for various kitchen sizes and cooling requirements. The chief financial officer (CFO) at Lamothe has been
looking at the segmented income statement for the fan and is concerned about the results for the 36-inch model.
Revenues
Variable costs
Fixed costs allocated to products
Operating profit (loss)
36 Inch
$ 374,100
232,600
148, 230
$ (6,730)
If the 36-Inch model is dropped, the revenue associated with it would be lost and the related variable costs saved. In addition, the
company's total fixed costs would be reduced by 25 percent.
Required A Required B
Required:
a. Prepare a differential cost schedule to support your recommendation.
b. Should Lamothe Kitchen and Bath should drop the 36-Inch model product line?
44 Inch
$ 576,500
286,680
226,464
$ 63,356
Complete this question by entering your answers in the tabs below.
Revenue
Less variable costs
Contribution margin
Less fixed costs
Operating profit
54 Inch
$ 354,300
164,500
139,806
$ 49,994
Status Quo
Prepare a differential cost schedule to support your recommendation. (Select option "increase" or "decrease", keeping Status
Quo as the base. Select "none" if there is no effect.)
Alternative:
Drop
36-Inch Fan
Difference
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