A. If this product is dropped, the company's fixed overhead costs would be unchanged in total. This product is covering its variable costs and also a portion of the fixed overhead allocated to it. If this product were dropped, the amount of allocated fixed costs being covered by it would no longer be covered, and overall net income would actually be lower.
B. The problem tells us that Raynolds is currently operating at less than full capacity because of market saturation for lawn fertilizer. Because of this market saturation, increasing output is not a good solution, since there would not be adequate market demand for the increased output. The increased output would either pile up, unsold, or it would have to be sold at a lower price, which could result in a larger loss per unit sold. Either way, the company's net cash flow could be decreased because of the increased output without increased demand.
C. The problem does not give any information on the cost driver being used to allocate fixed overhead. Therefore, this answer does not make sense.
D. Because all of its variable costs and some of its allocated fixed overhead costs as well are being covered by the sales price, continuing to produce and market the ferbilizer is a good idea, at least for the short term. This product is covering its variable costs and also a portion of the fixed overhead allocated to it. If this product were dropped, the amount of allocated fixed overhead costs being covered by it would no longer be covered. Overall net income would actually be lower unless another more profitable product could be found to take the place of the fertilizer in Reynolds' product line. Finding a more profitable product to replace the fertilizer is a possible solution for the long term, but for the short term, the best solution is to continue to produce and market this fertilizer.
