Discontinue the product: If the product line sales volume goes down year by year or variable expenses increased year by year makes the product not to sales for profit or company didn’t having ability to survive against its competitors, on those time company’s management wants to discontinue the product line by selling it or decided to stop it. To determine: The financial advantage or disadvantage, if it discontinues the 2nd product line Solution: XYZ company has financial disadvantage if 2nd product line discontinue from its operations because this product line gives $3,600,000 as contribution profit and $1,980,000 as net profit annually, company would lose this profit in future if discontinued. 2 n d product considered as good profit generating product line so no need to be discontinue, because its productivity could increase further and company could increase its selling price or reduce unwanted cost especially from traceable fixed manufacturing overhead to get more profit. Formula: S a l e s r e v e n u e = P r o d u c t i o n u n i t s * s e l l i n g p r i c e . C o n t r i b u t i o n p r o f i t p e r u n i t = S a l e s p e r u n i t − V a r i a b l e e x p e n s e p e r u n i t . V a r i a b l e e x p e n s e p e r u n i t = D i r e c t m a t e r i a l s + D i r e c t l a b o r + v a r i a b l e a n d t r a c e a b l e m a n u f a c t u r i n g o v e r h e a d . T o t a l c o n t r i b u t i o n p r o f i t = P r o d u c t i o n u n i t s * c o n t r i b u t i o n p r o f i t p e r u n i t . C o n t r i b u t i o n p r o f i t = S a l e s r e v e n u e – v a r i a b l e e x p e n s e . Explanations: S a l e s r e v e n u e = 90 , 000 u n i t s * $ 80 = $ 7 , 200 , 000 C o n t r i b u t i o n p e r u n i t = $ 80 − $ 58 = $ 22 p e r u n i t . V a r i a b l e e x p e n s e p e r u n i t = $ 12 + $ 15 + $ 5 + $ 8 + $ 18 = $ 58. T o t a l v a r i a b l e e x p e n s e = 90 , 000 u n i t s * $ 58 = $ 5 , 220 , 000. T o t a l c o n t r i b u t i o n p r o f i t = 90 , 000 u n i t s * $ 22 = $ 1 , 980 , 000. Conclusion: Above explanation stated the XYZ company has financial disadvantage if 2nd product line discontinued from its operations.

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