Suppose Cool Rays Is Considering Dropping Its Tinted Lens Product

question 145

Essay

Suppose Cool Rays is considering dropping its Tinted Lens product line.Assume that during the past year,the Tinted Lens product line income statement showed the following:

Fixed manufacturing overhead costs account for 40% of the cost of goods,while only 30% of the operating expenses are fixed.Since the Tinted Lens line is only one of Cool Rays product lines,only $325,000 of direct fixed costs (the majority of which is advertising)will be eliminated if the product line is discontinued.The remainder of the fixed costs will still be incurred by Cool Rays.If the company decides to drop the product line,what will happen to the company's operating income? Should Cool Rays drop the product line?

Recognize the similarities and differences between amortization and depreciation across asset types.

Identify the nature of retained earnings and their representation on financial statements.

Analyze the relationship between reported profits and actual cash flow.

Determine actions that impact a company's cash balance.

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Definitions:

Overhead Cost Variance

The difference between the actual overhead costs incurred and the standard overhead costs expected for a certain level of operation.

Standard Overhead Applied

Standard overhead applied refers to the allocation of estimated overhead costs to individual products or services based on a predetermined rate.

Total Controllable Cost Variance

The difference between the actual controllable costs incurred and the standard or expected controllable costs, aiming to measure performance in managing costs that are supposed to be under the company's control.

Overhead Costs

Expenses that are not directly tied to the production of goods or services, such as rent, utilities, and administrative salaries.