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What is the incremental effect on profits if the sour cream product line is dropped? Should Keith Inc. drop the sour cream product line?

What is the incremental effect on profits if the sour cream product line is dropped? Should Keith Inc. drop the sour cream product line?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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### Product Line Profitability Analysis for Keith Inc. Keith Inc. manages four product lines: sour cream, ice cream, yogurt, and butter. Each product line has its own market demand that is independent of the others. The fixed costs of operating these product lines are partially direct (25%) and the majority are allocated (75%). #### June Financial Results: | | 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 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 | #### Analysis Questions: 1. **Incremental Effect on Profits**: - Determine how dropping the sour cream product line impacts overall profitability. 2. **Decision on Sour Cream Product Line**: - Evaluate whether Keith Inc. should discontinue the sour cream product line based on its profitability and potential impact on total company performance.
Transcribed Image Text:### Product Line Profitability Analysis for Keith Inc. Keith Inc. manages four product lines: sour cream, ice cream, yogurt, and butter. Each product line has its own market demand that is independent of the others. The fixed costs of operating these product lines are partially direct (25%) and the majority are allocated (75%). #### June Financial Results: | | 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 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 | #### Analysis Questions: 1. **Incremental Effect on Profits**: - Determine how dropping the sour cream product line impacts overall profitability. 2. **Decision on Sour Cream Product Line**: - Evaluate whether Keith Inc. should discontinue the sour cream product line based on its profitability and potential impact on total company performance.
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