Axelrod Company makes three types of T-Shirts, Calm, Windy, and Gale. Mr. Brown, the general manager of the Company is disappointed with low sales and low profitability of Gale and is considering dropping the product. He believes that such a move will allow him to focus more attention to other profitable lines. He discusses this with you and asks for your opinion. You gather the following information about last year’s performance of the two products.
Calm Windy Gale
Units Sold 25,000 18,750 3,750
Selling Price/unit $ 30 $ 32 $ 40
Direct Materials/unit $ 10 $ 10 $ 15
Direct Labor/unit $ 14 $ 14 $ 21
There is no variable overhead. Annual fixed overhead amounts to $ 168,000 and will remain the same whether the product line is dropped or retained. The fixed overhead rate established by the company was $ 3.60 per unit. . The analysis provided to Mr. Brown on the basis of which he was considering to drop Gale from the line of products sold was as follows:
` Calm Windy Gale
Selling Price/unit $ 30.00 $ 32.00 $ 40.00
Direct Materials/unit ($ 10.00) ($ 10.00) ($ 15.00)
Direct Labor/unit ($ 14.00) ($ 14.00) ($ 21.00)
Fixed Overhead/unit ($ 3.60) ($ 3.60) ($ 3.60)
Operating profit per unit $ 2.40 $ 4.40 ($ 0.40)
Given the foregoing information, what advice will you give to Mr. Brown? Explain the conceptual reasoning behind your advice. Also provide numerical analysis to support your explanation.