accounting-Axelrod Company makes three types of t-shirts

QUESTION

Case 3
Axelrod Company
by
Khursheed Omer

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 three products.

Calm Windy Gale
Units Sold 25,000 18,750 3,750

Selling Price/unit $ 30 $ 32 $ 39

Production Cost:

Direct Materials/unit $ 10 $ 10 $ 15
Direct Labor/unit $ 14 $ 14 $
21

There is no variable
overhead. Annual total 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 $ 39.00
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 ($ 0.60)
=========================================

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.

ANSWER:

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