Question

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

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?

 


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Answer #1

Financial Disadvantage of $26,800 will be the result as the Loss is higher when the division is discontinued.

ParticularsContinue optionDiscontinue option
Sales8407000
Variable Expenses4368000
Fixed Manufacturing Expense (Note)28560083600
Profit/(Loss)118300-83600
Fixed Selling & Administrative Expense (Note)24380068700
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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