Question

The management of Wengel Corporation is considering dropping product B90D. Data from the company's accounting system appear below:

Sales	$	790,300
Variable expenses	$	410,700
Fixed manufacturing expenses	$	268,800
Fixed selling and administrative expenses	$	229,400

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $190,000 of the fixed manufacturing expenses and $164,600 of the fixed selling and administrative expenses are avoidable if product B90D is discontinued.

Required:

What would be the financial advantage (disadvantage) of dropping B90D? Should the product be dropped?

Answer 1

Loss to be suffered in product is continued: Sales Less: Variable expenses Contribution margin Less: Fixed manufacturing expenses Fixed selling and administrative expenses Net Loss Unavoidable fixed expense to be borne if product is dropped: Fixed manufacturing expenses (268800-190000) Fixed selling and administrative expenses (229400-164600) Total unavoidable fixed expense 78,800 64,800 143,600 790,300 410,700 379,600 268,800 229,400 (118,600) If product is continued then the company has to bear a loss of $118,600 but if is discontinued then it has to incurr fixed expense of $143,600 without earning any revenue from the product. Thus there will be an additional loss of 143600-118600 = $25,000 if the product is dropped. The product should not be dropped to avoid additonal loss of $25,000. Please give as many likes for the hard work. Thanks.