Question

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

Sales	$	940,000
Variable expenses	$	379,000
Fixed manufacturing expenses	$	361,000
Fixed selling and administrative expenses	$	241,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $215,000 of the fixed manufacturing expenses and $176,000 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

• $(41,000)

• $170,000

• $41,000

• $(170,000)

Answer 1

Answer: $(170,000)

Calculation:

Particulars	$
Avoidable Fixed manufacturing expenses	215,000
Avoidable Fixed selling and administrative expenses	176,000
Contribution margin lost if L07E is discontinued	(561,000)
Financial Disadvantage of discontinuing the product	(170,000)

Contribution margin lost = Sales - Variable expenses

                                             = $940,000 - $379,000

                                             = $561,000

All the best...