Westover Corporation is considering dropping product JPL8. Data from the company
ID: 2458470 • Letter: W
Question
Westover Corporation is considering dropping product JPL8. Data from the company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $193,500 of the fixed manufacturing expenses and $108,500 of the fixed selling and administrative expenses are avoidable if product JPL8 is discontinued.
According to the company's accounting system, what is the net operating income earned by product JPL8? (Input the amount as a positive value. Omit the "$" sign in your response.)
What would be the effect on the company's overall net operating income of dropping product JPL8?(Input the amount as a positive value. Omit the "$" sign in your response.)
Should the product be dropped?
Westover Corporation is considering dropping product JPL8. Data from the company's accounting system appear below:
Explanation / Answer
a) Net operating loss of JPL8 according to the company's accounting system = 55,000
Calculation given below:
Sales
$
620,000
Less: costs
Variable expense
$
255,000
Fixed manufacturing expenses
$
236,000
Fixed selling and administrative
expense
$
184,000
Net Operating loss of JPL8 -55,000
b.1) If the product JPL8 is dropped, the company's overall net operating income will drecrease by 247,000
This is because the real profit from the product would be $247,000 as shown below.
It is to be noted that for finding the product specific profit the allocated fixed costs are not to be considered. They are the 193,500 & 108,500 of the fixed costs.
Besides, if the product is dropped these costs of 193500 and 108500 cannot be saved. They are irrelevant for making the decision on dropping the product JPL8.
b.2) Should the product be dropped ? No.
This is so because the product gives an operating profit of $247,000
Sales
$
620,000
Less: costs
Variable expense
$
255,000
Fixed manufacturing expenses
$
236,000
Fixed selling and administrative
expense
$
184,000
Net Operating loss of JPL8 -55,000
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