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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Decision to discontinue a product
On the basis of the following data, the general manager of Sandals Industries Inc. decided to discontinue Children's Sandals because it reduced operating income by $65,000. What is the flaw in this decision?

To determine

Concept Introduction:

Cost Volume Profit (CVP) Analysis:

The Cost Volume Profit analysis is the analysis of the relation between cost, volume, and profit of a product. It analyzes the cost and profits at the different level of production, in order to determine the breakeven point and required the level of sales to earn the desired profit.

Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones.

The formula for contribution margin is as follows:

Contribution margin = Sales - Variable cost.

Similarly contribution margin ratio = Contribution/sales

To Indicate:

The Flaw in the decision of the company

Explanation
    Children's Sandals
    Sales $ 400,000
    Less: Relevant Costs:
    Variable Cost of Goo...

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