Reference: 09-06
Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. $$\begin{array} { | l | c | }
\hline \text { Sales } ( 6,500 \text { Tams at } \$ 130 \text { each } ) & \$ 845,000 \
\hline \text { Variable cost of sales } & 390,000 \
\hline \text { Variable distribution costs } & 65,000 \
\hline \text { Fixed advertising expense } & 275,000 \
\hline \text { Salary of product line manager } & 25,000 \
\hline \text { Fixed manufacturing overhead } & 145,000 \
\hline \text { Net loss } & ( \$ 55,000 \
\hline
\end{array}$$ Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturing costs of the company.
-Assume that discontinuing the Tam product would result in a $120,000 increase in the contribution margin of other product lines. How many Tams would have to be sold next year for the company to be as well off as if it just dropped the line and enjoyed the increase in contribution margin from other products?
A)6,000 units.
B)5,000 units.
C)6,500 units.
D)7,000 units.

Question

Reference: 09-06
Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. $$\begin{array} { | l | c | } 
\hline \text { Sales } ( 6,500 \text { Tams at } \$ 130 \text { each } ) & \$ 845,000 \
\hline \text { Variable cost of sales } & 390,000 \
\hline \text { Variable distribution costs } & 65,000 \
\hline \text { Fixed advertising expense } & 275,000 \
\hline \text { Salary of product line manager } & 25,000 \
\hline \text { Fixed manufacturing overhead } & 145,000 \
\hline \text { Net loss } & ( \$ 55,000 \
\hline
\end{array}$$ Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturing costs of the company.
-Assume that discontinuing the Tam product would result in a $120,000 increase in the contribution margin of other product lines. How many Tams would have to be sold next year for the company to be as well off as if it just dropped the line and enjoyed the increase in contribution margin from other products?
A)6,000 units.
B)5,000 units.
C)6,500 units.
D)7,000 units.

Quizplus · Accepted Answer

To determine how many Tams need to be sold to be as well off as if the line were dropped, we first calculate the net benefit of dropping the line, which is the $120,000 increase in contribution margin from other products. This amount needs to be matched or exceeded by continuing the Tam product line.The contribution margin per Tam is calculated as follows:- Selling price per Tam = $130- Variable cost per Tam = Variable cost of sales / Units sold = $390,000 / 6,500 = $60- Variable distribution cost per Tam = Variable distribution costs / Units sold = $65,000 / 6,500 = $10- Contribution margin per Tam = Selling price per Tam - Variable cost per Tam - Variable distribution cost per Tam = $130 - $60 - $10 = $60To cover the $120,000 increase in contribution margin from other products by selling Tams, we divide the needed increase by the contribution margin per Tam:- Required increase in contribution margin / Contribution margin per Tam = $120,000 / $60 = 2,000 unitsSince the company was already planning to sell 6,500 units, the additional units needed to match the $120,000 increase are added to this amount:- Base units (6,500) + Additional units needed (2,000) = 8,500 unitsHowever, the correct answer is not listed in the options provided, indicating a mistake in my calculation or interpretation. The correct approach is to find how many units need to be sold to cover the fixed costs and the net loss, plus the $120,000 increase in contribution margin, without considering the initial 6,500 units as a base for additional units. Let's correct the approach:The fixed costs that will remain whether the Tam is discontinued or not are:- Fixed advertising expense = $275,000- Salary of product line manager = $25,000- Fixed manufacturing overhead (irrelevant as it does not change) = $145,000 (not considered in the new calculation)The net loss if the product line continues is $55,000, which means the product line needs to cover its fixed costs and the net loss to break even. However, to be as well off as discontinuing the Tam, it also needs to cover the $120,000 that could be gained from the increase in contribution margin of other products.The calculation error in determining the number of units required to match the benefit of discontinuing the product line led to an incorrect conclusion. The correct calculation should focus on how many units need to be sold to achieve a net benefit equivalent to the $120,000 increase in contribution margin from discontinuing the Tam product line, considering only variable costs and the contribution margin per unit. Without the correct data or calculation, the provided answer options cannot be accurately evaluated based on the initial incorrect explanation.

Reference: 09-06 Clemson Company Reported the Following Results Last Year

Reference: 09-06
Clemson Company Reported the Following Results Last Year