Question

The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below:

Sales	$	920,000
Variable expenses	$	388,000
Fixed manufacturing expenses	$	370,000
Fixed selling and administrative expenses	$	250,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $233,000 of the fixed manufacturing expenses and $194,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

Multiple Choice

• $(88,000)

• $105,000

• $88,000

• $(105,000)

Answer 1

answer $(105,000) explanation after dropping before dropping product LOVE sales 920000 0 less variable costs 388000 0 coontribution margin L 532000 0 less fixed cots fixed mfg costs 370000 137000 fixed selling and admn cost 250000 56000 total fixed cost 620000 193000 operating profit (loss) -88000 -193000 difference in profit -105000 since the unavoided fixed cost is more so it is idsadvantage of dropping the product