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Round Trampoline Case Study

1131 Words5 Pages

The reason we say that we need to continue this product is due to the common fixed cost associated with it. A common fixed cost is a fixed cost that supports the operation of more than one segment of an organisation and is not avoidable in whole or part even if we try to eliminate one segment. The general factory overhead which itself has $27,000 associated with will still persist and will incur with other products in their overhead cost reducing the profit from other segments. This will drop the overall net operating income of the company. Hence to see it more clearly before making any decision, the company need to drop the overhead cost of company as it is a common cost to the company. A more useful profitability income statement for the case will …show more content…

We can clearly see that the Round trampoline is generating segment margin of $10,000 and is covering all of its own traceable fixed costs. Now in this situation, unless the company find something which can create higher segment margin than $10,000 towards the company net operating income, the idea to drop the product will lead to drop in total net profit income of company.
Cost Profit and Break Even Analysis
Contribution margin ratio is the contribution from an activity expressed as a percentage of the sales, thus in case of round trampolines the contribution margin will be:
Contribution margin ratio= (Contribution/Sales Revenue)*100 = (75,000/130,000)*100 = 57.7%
Break Even in Sales = Fixed Cost/Contribution Margin = 92,000/0.57 =

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