EXERCISE 12-17 (20 MINUTES)

2. a. No, the cookbook line should not be eliminated. The cookbook is cov-

ering all of its own costs and is generating an $18,000 segment mar-

gin toward covering the company’s common costs and toward profits.

(Note: Problems relating to the elimination of a product line are cov-

ered in more depth in Chapter 13.)

b. No, it is probably unwise to focus all available resources on promoting

the travel guide. The company is already spending nearly as much on

the promotion of this line as it is on the other two lines together. Fur-

thermore, the travel guide has the lowest contribution margin ratio of

the three products. Nevertheless, we cannot say for sure which prod-

uct should be emphasized in this situation without more information.

If the equipment is being fully utilized, increasing the production of

any one product would require cutting back on one of the other

products. In Chapter 13 we will discuss how to choose the most prof-

itable product when there is a constraint that forces such a trade-off

between products.