The management of Wengel Corporation is considering dropping product B90D. Data from the company's accounting system appear below:
Sales | $ 840,700 |
---|---|
Variable expenses | $ 436,800 |
Fixed manufacturing expenses | $ 285,600 |
Fixed selling and administrative expenses | $ 243,800 |
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $202,000 of the fixed manufacturing expenses and $175,100 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?
Financial Disadvantage of $26,800 will be the result as the Loss is higher when the division is discontinued.
Particulars | Continue option | Discontinue option |
Sales | 840700 | 0 |
Variable Expenses | 436800 | 0 |
Fixed Manufacturing Expense (Note) | 285600 | 83600 |
Profit/(Loss) | 118300 | -83600 |
Fixed Selling & Administrative Expense (Note) | 243800 | 68700 |
Net Profit | -125500 | -152300 |
Net Loss is 125,500 when the division is continued and 152,300 when division is discontinued. So, the financial disadvantage will be $26,800
Note:
1. Fixed Manufacturing Expense is reduced by 202,000 while discountinuing. (285,600-202,000 = 83,600)
2. Fixed Selling & Admin Expense is reduced by 175,100 while discontinuation, (243,800-175,100 = 68700)
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