You are the Management Accountant for a well-known manufacturer of the titanium bike frame. The company’s hottest product is the AX, which provides most of the firm’s revenue. Management is considering dropping the AL product line, which has not turned a profit for two consecutive years. The CFO comes to you and asks what would do given the following data:

Operating Statements	AX	AL	Total
Products manufactured and sold Sales revenue Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Sales and administrative costs Operating profit	20 $30,000 (2,000) (4,000) (1,000) (2,000) (2,000) $19,000	24 $43,200 (8,400) (7,680) (4,800) (17,400) (6,000) $(1,080)	$73,200 (10,400) (11,680) (5,800) (19,400) (8,000) 17,920

Note: Approximately 20% of the fixed manufacturing overhead is directly related to (i.e., created within) each segment.

Instructions

1. Distinguish between direct and indirect costs and find the segment profit for each product.
2. Determine the gain or loss that the firm would incur if it dropped the AL product line. What figure would you provide the CFO?
3. Explain your recommendation to continue or discontinue the product line AL.