7 marks 3 Alwaysstart your answer in column B.,COLUMN A IS FOR INSTRUCTOR USE ON

Question

7 marks 3 Alwaysstart your answer in column B.,COLUMN A IS FOR INSTRUCTOR USE ONLY 4 You may use space below the question to show calculations. 6 Please put correct answer in the underlined space provided. ABC Company makes and sells two products, X and Y, The income statement for last year was as follows: Product X Product Y S 152,000 $168,000 80,000 56,000 35,920 16,800 40,000 S(20,720) Sales Variable cost Fixed Overhead 12 13 14. 48,000 40,000 12,800 11,200 Variable selling and administrative expenses Fixed selling and administrative expenses Operating income The fixed costs are unavoidable and are allocated to products on the basis of sales revenue. When the president saw the income statement, he decided that the company should drop Product Y. If Product Y is dropped, the company's cost structure 18 19 21 will remain the same and sales of Product X are expected to increase by 23 Required: 70% 24 a) Compute the change in annual operating income if Product Y is 25 (7 Marks) discontinued and only Product X is sold. 29 30 32

Explanation / Answer

Solution a:

Therefore net operating income will increase by $11,760 on discontinue of product Y and only product X is sold by the company.

Differential Analysis - Continue Product Y (Alt 1) or Discontinue Product Y (Alt 2) Particulars Continue Product Y (Alt 1) Discontinue Product Y (Alt 2) Differential effect on income (Alt 2) Details Amount Details Amount Sales $152,000 + $168,000 $320,000.00 $152,000 + $152,000*70% $258,400.00 -$61,600.00 Variable Costs: Variable manufacturing cost $48,000 + $80,000 $128,000.00 $48,000 + $48,000*70% $81,600.00 -$46,400.00 Variable selling and administrative expenses $12,800 + $35,920 $48,720.00 $12,800 + $12,800*70% $21,760.00 -$26,960.00 Contribution margin $143,280.00 $155,040.00 $11,760.00 Fixed Costs: Fixed manufacturing overhead $40,000 + $56,000 $96,000.00 $40,000 + $56,000 $96,000.00 $0.00 Fixed selling and administrative expenses $11,200 + $16,800 $28,000.00 $11,200 + $16,800 $28,000.00 $0.00 Total Fixed costs $124,000.00 $124,000.00 $0.00 Operating Income $19,280.00 $31,040.00 $11,760.00

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