Based on the following information, a plastic pipe manufacturer is considering dropping a pipe that can handle high pressure from its product mix

Question

Based on the following information, a plastic pipe manufacturer is considering dropping a pipe that can handle high pressure from its product mix:

Revenues from high-pressure pipe	$100,000
Costs from high-pressure pipe:
Direct material	(30,000)
Direct labor	(50,000)
Allocated overhead	(30,000)
Loss from high-pressure pipe	($10,000)

What factors should the manufacturer consider before dropping this product?

Accepted Answer

Direct costs are generally avoidable, but the allocated overhead might not be. If only half of the allocated overhead ($15,000) were avoidable, then revenues ($100,000) would be greater than avoidable costs ($95,000). Another factor to consider is any alternative use of the space, labor, and machines presently devoted to making high-pressure pipe. If an alternative use of those resources exists, managers should consider the profit forgone from those alternative uses as part of the opportunity cost of making high-pressure pipe. Also, managers should consider the effect of dropping the high-pressure pipe on the demand for its other products. Some current customers may switch to suppliers that offer both the high pressure pipe and other pipe in order to minimize their costs of dealing with multiple suppliers.

Question 12.9: Based on the following information, a plastic pipe manufactu...

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