Horton and Associates produces two products named BigBlast and LittleBlast. Last month 4,000 units of BigBlast and 1,000 units of LittleBlast were produced and sold. Following are average prices and costs for last month: BigBlast LittleBlast
Selling price $100 $200
Direct materials (25)(75)
Direct labour (15)(35)
Variable overhead (5)(30)
Product line fixed costs (10)(40)
Corporate fixed costs (25)(25)
Average margin per unit $ 20 $( 5)
The production lines for both products are highly automated, so large changes in production cause very little change in total direct labour costs. Workers who are classified as direct labour monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than "corporate fixed costs" listed under each product line could be avoided if the product line were dropped.
The following qualitative factors are relevant to Horton's decision:
I. Would dropping one product affect the sales of the other product?
II. Are all product line fixed costs completely avoidable?
III. Would layoffs affect other workers' morale?
A)I only
B)I and III only
C)I, II, and III
D)II and III only

Question

Quizplus · Accepted Answer

All three qualitative factors listed are relevant to Horton's decision. Dropping one product could affect the sales of the other product, as customers may perceive the company as less reliable or trustworthy if they discontinue a product line. Additionally, some product line fixed costs may not be completely avoidable, depending on contractual obligations or other factors. Layoffs could also affect the morale of other workers, leading to decreased productivity or increased turnover. Therefore, all three factors should be considered before making a decision.

Horton and Associates Produces Two Products Named BigBlast and LittleBlast