A value-driven car manufacturer, Metlock, started its business more than 50 years ago, making and selling a sedan body style. Sedans were popular at the time, and this one drove the success of Metlock for years due to its practical yet stylish nature. As times changed, Metlock designed models in different body styles, and those models have outpaced sedans, as follows.
Sedan
SUV
Truck
Van
Sales
$1,200,000
$4,194,000
$3,873,000
$2,004,000
Variable costs
696,000
2,010,000
1,808,000
1,102,000
Contribution margin
504,000
2,184,000
2,065,000
902,000
Fixed costs
806,400
895,000
1,205,000
798,000
Operating income (loss)
$(302,400)
$1,289,000
$860,000
$104,000
The income statements above reflect the second consecutive year the sedan category has lost money. Metlock is concerned about dropping this vehicle, however, since the company's success was originally built on it.
(a)
Metlock believes it can save $604,800 in fixed costs associated with the sedans if it drops that vehicle category. Should the company seriously consider dropping it? How much better or worse off, financially, would it be by dropping the sedan?
Metlock would be
by $
