Problem 2: The management of Wendel Corporation is considering dropping product B90X. Data from the company's...
Problem 2:
The management of Wendel Corporation is considering dropping product B90X. Data from the company's accounting system appear below:
|
Sales |
$720,000 |
|
Variable expenses |
$374,000 |
|
Fixed manufacturing expenses |
$245,000 |
|
Fixed selling and administrative expenses |
$209,000 |
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $173,000 of the fixed manufacturing expenses and $150,000 of the fixed selling and administrative expenses are avoidable if product B90X is discontinued.
Required:
What would be the financial advantage (disadvantage) of dropping B90X? Should the product be dropped? Show your work!
|
Keep Product |
Drop Product |
Difference |
|
|
Sales |
|||
|
Variable Cost |
|||
|
Contribution Margin |
|||
|
Fixed Expenses: |
|||
|
Fixed Manufacturing Expenses |
|||
|
Fixed Selling & Administrative |
|||
|
Total Expenses |
|||
|
Net Income |
Homework Answers
What would be the financial advantage (disadvantage) of dropping B90X? Should the product be dropped? Show your work!
|
Keep Product |
Drop Product |
Difference |
|
|
Sales |
720000 | 0 | -720000 |
|
Variable Cost |
-374000 | 0 | 374000 |
|
Contribution Margin |
346000 | 0 | -346000 |
|
Fixed Expenses: |
|||
|
Fixed Manufacturing Expenses |
-245000 | -72000 | 173000 |
|
Fixed Selling & Administrative |
-209000 | -59000 | 150000 |
|
Total Expenses |
-454000 | -131000 | 323000 |
| Net income | -108000 | -131000 | -23000 |
Financial (disadvantage) = -23000
Company should not dropped the product
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