Problem 1. Laurel Inc. has three product lines: A, B, and C.

  A   B   C   Total

Sales P20,000   P35,000   P22,000   P77,000

Variable costs     8,000     10,000     14,000     32,000

Contribution margin 12,000   25,000   8,000   45,000

Fixed costs     4,000     11,000       9,000     24,000

Net income P  8,000   P14,000   P (1,000)   P21,000

Management is considering dropping product line C. If it is discontinued, one-half of its fixed

costs can be avoided. The discontinuation of product line C would:

a. decrease net income by P3,500.

b. increase net income by P1,000.

c. decrease net income by P12,500.

d. increase net income by P4,500.

 
Problem 2
Tremaine Inc. has three product lines: A, B, and C.

  A   B   C   Total

Sales P50,000   P85,000   P90,000   P225,000

Variable costs   30,000     30,000     44,000     104,000

Contribution margin 20,000   55,000   46,000   121,000

 Fixed costs   23,000     25,000     18,000       66,000

Net income P (3,000)   P30,000   P28,000   P  55,000

Management is considering dropping product line A. If it is discontinued, P18,000 of its fixed

costs can be avoided. The discontinuation of product line A would:

a. decrease net income by P15,000.

b. increase net income by P21,000.

c. decrease net income by P2,000.

d. increase net income by P3,000.

 
Problem 3
Carlton Products has three product lines: A, B, and C.

  A   B   C   Total

Sales P500,000   P550,000   P700,000   P1,750,000

Variable costs   280,000     420,000     300,000     1,000,000

Contribution margin 220,000   130,000   400,000   750,000

Fixed costs   100,000     140,000     150,000        390,000

Net income P120,000   P (10,000)   P250,000   P  360,000

Management is considering dropping product line B. If it is discontinued, all of its fixed costs
can be avoided. The discontinuation of product line B would:

a. decrease net income P10,000.

b. increase net income P140,000.

 c. decrease net income P130,000.

d. increase net income P10,000.

 
Problem 4
Paxton Products has three product lines: A, B, and C.

  A   B   C   Total

Sales P90,000   P150,000   P200,000   P440,000

Variable costs   50,000     120,000     100,000     270,000

Contribution margin 40,000   30,000   100,000   170,000

Fixed costs   15,000       40,000       50,000     105,000

Net income P25,000   P (10,000)   P  50,000   P  65,000

Management is considering dropping product line B. In order for the dropping of product line B
to not cause an overall decrease in profits, product line B's avoidable fixed costs should be at
least:

a. P40,000

b. P30,000

c. P10,000

d. P70,000

 
5.  A particular product line is most likely to be dropped when:
a. its total fixed costs are more than its contribution margin.

b. its avoidable fixed costs are more than its contribution margin.

c. its unavoidable fixed costs are more than its contribution margin.

d. its variable costs are more than its fixed costs.