The Mansfield Company manufactures and sells two lines of fishing rods.During the most recent accounting period,the Pro line and the Novice line sold 15,000 and 2,000 units,respectively.The company's most recent financial statements are shown below: $\begin{array}{lrr}
&\text {Pro}&\text {Novice}\
\text { Sales } & \$ 900,000 & \$ 240,000\
\text { Less cost of goods sold }\
\text { Unit-level production cost } & 600,000 & 135,000 \
\text { Depreciation, production equipment } & \underline{ 125,000}& \underline{50,000 }\
\text { Gross margin } & \$ 175,000& \$ 55,000\
\text { Less operating expenses: }\
\text { Unit-level selling and administrative costs } & 40,000 & 65,000 \
\text { Corporate-level facility expenses (fixed) } & \underline{ 36,000} & \underline{36,000 }\
\text { Net income (loss) } & \underline{\$ 99,000 }& \underline{\$(46,000)}
\end{array}$
Based on this information,the company should:
A) Eliminate the Novice line because it is operating at a loss.
B) Keep the Novice line because it contributes $40,000 to total profitability.
C) Keep the Novice line because it contributes $55,000 to total profitability.
D) It is impossible to determine with the given information.

Question

The Mansfield Company manufactures and sells two lines of fishing rods.During the most recent accounting period,the Pro line and the Novice line sold 15,000 and 2,000 units,respectively.The company's most recent financial statements are shown below: $\begin{array}{lrr}
&\text {Pro}&\text {Novice}\
\text { Sales } & \$ 900,000 & \$ 240,000\
\text { Less cost of goods sold }\
\text { Unit-level production cost } & 600,000 & 135,000 \
\text { Depreciation, production equipment } & \underline{ 125,000}&  \underline{50,000 }\
\text { Gross margin } & \$ 175,000& \$ 55,000\
\text { Less operating expenses: }\
\text { Unit-level selling and administrative costs } & 40,000 & 65,000 \
\text { Corporate-level facility expenses (fixed) } & \underline{ 36,000} &  \underline{36,000 }\
\text { Net income (loss) } &  \underline{\$ 99,000 }&  \underline{\$(46,000)}
\end{array}$
 Based on this information,the company should:
A) Eliminate the Novice line because it is operating at a loss.
B) Keep the Novice line because it contributes $40,000 to total profitability.
C) Keep the Novice line because it contributes $55,000 to total profitability.
D) It is impossible to determine with the given information.

Quizplus · Accepted Answer

The Novice line, despite showing a net loss, contributes to covering the fixed costs. The gross margin of $55,000 minus the unit-level selling and administrative costs of $65,000 results in a negative figure. However, since the corporate-level facility expenses are fixed and would not be eliminated with the discontinuation of the Novice line, the contribution of the Novice line towards covering these fixed costs is positive. The correct calculation to determine its contribution to total profitability should consider the gross margin minus the unit-level costs, not including the fixed corporate-level facility expenses, which are allocated equally but do not vary with the decision to keep or eliminate a product line. Therefore, the Novice line contributes to covering fixed costs that would otherwise reduce the profitability of the Pro line.

The Mansfield Company Manufactures and Sells Two Lines of Fishing