A decision whether or not to continue an old product line or departme

an add-or-drop decision. An add-or-drop decision must be based only o

Relevant information includes the revenues and costs which are direct
department. Examples of relevant information are sales revenue, direc
direct fixed overhead. Such decision must not be based on irrelevant i
fixed overhead because allocated fixed overhead will not be eliminate
is dropped.
The following example illustrates an add-or-drop decision:

$
$

Contributi $
Fixed Cost
Avoidable cost $
Unavoildable c $

Total Fixed $

700,000.00

Product B
$

(350,000.00) $

350,000.00

(76,363.64) $
(127,272.73) $

(203,636.36) $

Total

Ratio :

$
$
$

(127,272.73) $
(454,545.45)
0.28 $

A
B
D

$
$
$

(45,454.55) $
(45,454.55) $
(45,454.55) $

Desripti
Sale
Less: V/C
Variable cost

146,363.64

Product A
$
$

Contributi $
Fixed Cost
Avoidable cost $
Unavoildable c $
Ratio for Unav $
$

700,000.00

(76,363.64) $
(127,272.73) $
(12,727.27) $
133,636.36

250,000.00

(300,000.00) $

300,000.00

(200,000.00)

50,000.00

(65,454.55) $
(109,090.91) $

(174,545.45) $
125,454.55

(27,272.73)
(45,454.55)

(72,727.27)
(22,727.27)

(109,090.91) $
0.24

0.28
0.24
0.48

$
$
$

Product B
$

(350,000.00) $

350,000.00

Product C

600,000.00

600,000.00
(300,000.00)

300,000.00
(65,454.55)
(109,090.91)
(10,909.09)

(218,181.82)
0.48
(12,727.27)
(10,909.09)
(21,818.18)

uct
C is
drop
ted

Sale
Less: V/C
Variable cost

Product c

Prod

Desripti Product A

114,545.45

Use the incremental approach to determine if Product C should be dropped.

Solution
By dropping Product C, the company will loose the sale revenue from the product line. The compay

will also obtain gains in the form of avoided costs. But it can avoid only the variable costs and direct fixed c
C and not the allocated fixed costs. Hence:
If Product C is Dropped
Gains:
(200,000.00)
Variable Cost $
Direct Fi $
(27,272.73)
Toal avoid $
(227,272.73)
Less: Sal $
250,000.00
Decrease $
22,727.27 $
(272,727.27) $
(22,727.27)

Prepaird By : Ikram Ullah jan

product line or department, or to start a new one is

sion must be based only on relevant information.
and costs which are directly related to a product line or
n are sales revenue, direct costs, variable overhead and
t be based on irrelevant information such as allocated
head will not be eliminated if the product line or department

is d
ropt
ed

rop decision:

Product D
$
$

Profit & Loss

1,200,000.00

(400,000.00) $

800,000.00

2,750,000.00
(1,250,000.00)

1,500,000.00

$
$

(130,909.09) $
(218,181.82) $

(300,000.00)
(500,000.00)

(349,090.91) $

(800,000.00)

40,000.00

34,285.71

450,909.09 $

68,571.43

700,000.00

Un abvoidable cost of C Dept

$
(45,454.55)
$
1.00

Product D
$

1,200,000.00

Profit & Loss

$

Deceasing income
2,500,000.00 due to closind of C Depart

###
$

$
$
$
$
$

(400,000.00) $

800,000.00

(130,909.09) $
(218,181.82) $
(21,818.18) $
429,090.91

m the product line. The compay

(1,050,000.00) Note : If we want to

1,450,000.00

closed the Depat C

so our income is
(272,727.27) decerasing for $ 1820000
(454,545.45) -1670000 so , we should
(45,454.55) not closed the depart c
677,272.73

nly the variable costs and direct fixed costs of product

###

(545,454.55)