Greetings,
I hereby submit this formal analysis bundled with detailed calculations regarding the low profitability of Product Gale and its overall effect on the company. Basing on my analysis, I have discovered that Axelrod Company is better off with Product Gale in its operations than without it. Find below the analysis and conclusion on the same:-
Total Income of all Products of Axelrod Company is as follows:
Calm Windy Gale
Sales $ 750,000 600,000 146,250
Variable Production Costs:
Direct Materials $ (250,000) (187,500) (56,250)
Direct Labor (350,000) (262,500) (78,750)
Fixed Overhead (90,000) (67,500) (13500)
Net Income $ 60,000 $ 82,500 $ (2,250)
Looking at the Total Revenue made by the company in the financial period
Total Revenue = Calm’s Profit+ Windy’s Profit + Gales Loss
= $ (60,000 + 82,500 – 2,250)
= $ 140,250
If product Gales is dropped from the production line:
The revenue it earns will be deducted from total revenue,
The variable costs associated with product Gale will be avoided and hence will be added as gains to the company (Horngren, Datar, & Rajan, 2015).
The fixed costs will remain because they are tied to the other Products Calm and Windy.
The result to the company’s financial will be as follows:-
If Product Gale is dropped
Gains to the company
Variable production costs (Avoidable costs)
Direct Labor $ 78,750
Direct Materials $ 56,250 $ 135,000
Less: Revenue lost by the company
Sales revenue $ (146,250)
Fixed Costs $ (13,500)
With Gale, the total company’s revenue is
Product Calms $ 60,000
Product Windy $ 82,500
Product Gale $ (2250)
Total Revenue $ 140,250
Without Gale the total revenue for the company is
Product Calm $ 60,000
Product Windy $ 82,500
Companies gains $ 135, 000
Company’s losses $ (159,750)
Total Revenue $ 117,750
Discussion
In light of all the above we see that Gale shirts according to the financial information provided yield loss for the company. The other two from the product portfolio both yield a profit. At this juncture, it is easy to point out that Gale is dragging the business down and should be weeded out. Looking keenly, Gale also yields the company some revenue regarding the sales revenue earned, and at the same time has its accompanied expenditure indirect materials, direct labor, and fixed expenses.
With Gale shirts, Axelrod’s revenue totals at $140,250. Without Gale Product, however, one has to bring into consideration the gains that befall the company as well as the associated losses. The computation of the new revenue factoring in the variable production costs and fixed costs brings the new total revenue at $ 117,750.
In this respect, despite the negative operating profit per unit of Gale Product, the overall economic effect of Gale Product is positive. Gale shirts bring an economic of scale effect in drowning the expenditure from all company operations and firm should continue producing the product (Garrison, Noreen, Brewer, & McGowan, 2010). Dropping Product Gale would be unwise because the company will incur an overall loss of $ 22,500.
References
Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial Accounting. Issues in Accounting Education. http://doi.org/10.2308/iace.2010.25.4.792
Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis. Issues in Accounting Education (Vol. 25). http://doi.org/10.2308/iace.2010.25.4.789
