Question

Suire Corporation is considering dropping product D14E. Data from the company's accounting system appear below: Sales $ 620,000 Variable expenses $ 255,000 Fixed manufacturing expenses $ 236,000 Fixed selling and administrative expenses $ 184,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $193,500 of the fixed manufacturing expenses and $108,500 of the fixed selling and administrative expenses are avoidable if product D14E is discontinued. Required: a. According to the company's accounting system, what is the net operating income earned by product D14E? (Net losses should be indicated by a minus sign.) b. What would be the financial advantage (disadvantage) of dropping product D14E? Should the product be dropped?

Answer 1

Requirement a

Net loss = ($ 55,000)

Requirement b

Financial disadvantage of dropping = $(63,000)

Requirement c

The product should not be dropped.

Working

	Before discontinue	After Discontinue	Change in net income
Sales	$ 620,000
Variable Costs	$ 255,000
Contribution Margin	$ 365,000	$ 0
Fixed Expenses	$ 420,000	$ 118,000
Net Operating Income	-$ 55,000	-$ 118,000	-$ 63,000

The company will have a loss equal to Unavoidable fixed expense if product is dropped.

The loss will increase by $63000