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	$	650,000
Variable expenses	$	280,000
Fixed manufacturing expenses	$	242,000
Fixed selling and administrative expenses	$	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?

Answer 1

Answer :

(a). Company's accounting is Absorption costing thus net operating income earned by product D14E

Sales	$650,000
Less :	-
Variable expenses	$280,000
Fixed manufacturing expenses	$242,000
Fixed selling and administrative expenses	$190,000
Net operating income	$ -62000

(b). Financial advantage (disadvantage) of dropping product D14E is $305000 ($195,000 + $110,000) because investingation 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 discountinued

Thus company should dropped the product

Net financial advantage = 305000 - 62000 = 243000

Kindly Up-vote Thank You !!!