Question

Ankeil Corp. is deciding whether to keep or drop product SL412. Data from the company's accounting system regarding the product is as follows: 30 Sales $610,000 able Fixed manufacturing expenses Fixed selling and administrative expenses $234,000 $182,000 00:48:56 All fixed expenses of the company are fully allocated to products in the company's accounting system. If product SL412 is discontinued, $193,000 of the fixed manufacturing expenses and $108,000 of the fixed selling and administrative expenses are avoidable. Required a. According to the company's accounting system, what is the net operating income earned by product SL412? (Net losses should be indicated by a minus sign.) b. What would be the financial advantage (disadvantage) of dropping product SL412? Should the product be dropped? Net operating income (loss) a Financial advantage (disadvantage) The product dropped b

Answer 1

a.

Particulars	Amount
Sales	610000
Less: Variable expenses	246000
Contribution margin	364000
Fixed manufacturing expenses	234000
Fixed selling and admin expenses	182000
Total fixed costs	416000
Net operating Income	-52000

b.

Total fixed costs = 416,000

Less: Avoidable fixed costs = 301,000

Unavoidable fixed costs = 115,000

If the product is discontinued then net operating income that is decrease = contribution margin + unavoidable fixed costs

= 364,000 + 115,000

= 479,000

Financial advantage of 479,000 if the product is not dropped.