Suire Corporation is considering dropping product D14E. Data from the company's accounting system appear below:
Sales | $ | 600,000 |
Variable expenses | $ | 241,000 |
Fixed manufacturing expenses | $ | 232,000 |
Fixed selling and administrative expenses | $ | 180,000 |
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $192,500 of the fixed manufacturing expenses and $107,500 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?
Given,
Sales : $600,000 (A)
Variable expenses : $241,000 (B)
Fixed manufacturing expenses : $232,000 (C)
Fixed selling and distribution expenses : $180,000 (D)
a. Net operating income earned by product D14E is [A-B-C-D]
600,000-241,000-232,000-180,000 = -$53000 (Loss)
b. Avoidable Expenses if product D14E is discontinued,
Fixed manufacturing expenses : $192,500 (E)
Fixed selling and distribution expenses : $107,500 (F)
[A-B-E-F]
600,000-241,000-192,000-107,500 = $59000.
Net operating income would be decreased by $59000.
As the expenses decreased and income increased. The product D14E should not be dropped.
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