Price Candies (PC) makes three types of chocolate candy bars. The head of marketing, Nathan Lord found the chart below and believes PC should drop the Almond line. He asks controller, Faye Martin, to review the situation and determine the fate of the Almond Line. Solid Chocolate Crispy Chocolate Almond ChocolateSales$300,000 $500,000 $400,000 Unit Costs$(100,000) $(150,000) $(250,000)Facility & Product Costs$(150,000) $(250,000) $(200,000)Segment Income$50,000 $100,000 $(50,000)Required:a. Review the information above and determine the fate of the Almond Line. Prepare your answer in good form. Note: Facility and product level costs are fixed and will not change; they are allocated based upon sales.b. Prepare a memo defending your position on this important issue.
What will be an ideal response?
a.
No, the Almond Line should not be dropped. Dropping the Almond line would reduce income by $150,000 and force the fixed costs to be spread over the remaining two product lines.
| Status | Alternative | Difference | |||||||||
| Sales | $ | 1,200,000 | $ | 800,000 | $ | (400,000 | ) | ||||
| Unit Costs | $ | (500,000 | ) | $ | (250,000 | ) | $ | 250,000 | |||
| Facility & Product Costs | $ | (600,000 | ) | $ | (600,000 | ) | $ | 0 | |||
| Segment Income | $ | 100,000 | $ | (50,000 | ) | $ | (150,000 | ) | |||
b.
The memo should address the following issues:
1) The company needs to address the cost allocation methods.
2) Unless alternative uses can be found for the abandoned almond line, it is not beneficial to drop it at this time. It contributes to the overall profitability of PC.
3) If the Almond line is dropped, the following will happen:
| Solid Chocolate | Crispy Chocolate | ||||||
| Sales | $ | 300,000 | $ | 500,000 | |||
| Unit Costs | $ | (100,000 | ) | $ | (150,000 | ) | |
| Facility and Product Costs | $ | (225,000 | ) | $ | (375,000 | ) | |
| Segment Income | $ | (25,000 | ) | $ | (25,000 | ) | |
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