Question

TB Problem Qu. 12-178 Suire Corporation is considering dropping ... Suire Corporation is considering dropping product D14E. Data from the company's accounting system appear below: Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses $650,000 $280,000 $242,000 $190,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $195,000 of the fixed manufacturing expenses and $110,000 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? a. Net operating income (loss) Financial advantage (disadvantage) b The product dropped

Answer 1

a.

Income Statement
Sales	650,000
Variable expenses	-280,000
Contribution margin	370,000
Fixed manufacturing expenses	-242,000
Fixed selling and administrative expenses	-190,000
Net operating loss	-$62,000

a.

Net operating loss

($62,000)

b.

Differential Analysis
Saving in fixed manufacturing expenses	195,000
Saving in fixed selling and administrative expenses	110,000
Total savings	305,000
Loss of contribution margin	-370,000
Decrease in net operating income	-$65,000

b.

Financial disadvantage

($65,000)

The product

should not be

dropped

Kindly comment if you need further assistance. Thanks