1. The Discount Drug Company has three major product lines: drugs, cosmetics, and housewares. The company provides the following sales and cost information for the month of May for the store in total and for each separate product line (000 omitted):

	Drug	Cosmetics	Housewares	Total
Sales	$240	$ 300	$360	$ 900
Less: Variable expenses	160	180	200	540
CM	$ 80	$120	$160	$360
Less: Fixed costs
Salaries	$34	$40	$46	$120
Advertising	30	50	40	120
Other fixed costs	40	20	40	100
Total	$104	$110	$126	$340
Net income	$(24)	$10	$34	$20

 

The salaries represent wages paid to employees engaged directly in each product line area. Besides, the advertising represents direct advertising of each product line, and is avoidable if the line is dropped. Other fixed costs, which are all committed costs, will continue and will split equally between cosmetics and house wares.

1. Prepare a combined income statement for cosmetics and house wares on the assumption that drugs are discontinued with no effects on sales of the other product lines. 
2. On the basis of the analysis in question 1, would you advise dropping the drugs line?

Answer rating: 100% (QA)

Combined Income Statement for Cosmetics and Housewares Sales 300 360 660 Less Variable ex... View the full answer