Answer:
The correct choice here is A)
Delicious would be worse off if it discontinues Rum Raisin and would be better off if it discontinues Blue Moon.
Explanation:
Lets look at the figures:
Step I
Calculate the Total Costs for each product.
Total Cost (TC) = Fixed Cost + Variable Cost
TC for Rum Raisin =
$246,000+ $468,000
= $714,000
TC for Blue Moon =
$219,000 + $ 364,000
= $ 583 000
Step II
The business estimates that it can eliminate it's Fixed cost to a certain degree. Lets look at each before we make a decision.
New TC for each business is given as below:
New TC for Rum Raisin if 75% of Fixed Cost is eliminated =
$246,000+ ($468,000 x 25%)
= $246,000 + $117,000
New TC for Rum Raisin Ice Cream = $363,000
New TC for Blue Moon if 70% of it's Fixed Cost is removed =
$246,000+ ($468,000 x 30%)
= $246,000 + $140,400
New TC for Blue Moon Ice Cream = $386,400
The company <em>Delicious </em>is better off eliminating the product with the highest TC all other factors remaining accounted for and taken into consideration.
The product which must go is Blue Moon Ice Cream.
Cheers!
