The general manager at the Overall Manufacturing Company has submitted the follo

Question

The general manager at the Overall Manufacturing Company has submitted the following information for a specific line of heat exchangers with the recommendation to discontinue the round style heat exchanger because of its continued net operating income losses. Overall Manufacturing Company Heat Exchangers Total Round Rectangular Octagonal Sales $1,000,000 $140,000 $500,000 $360,000 Less variable expenses $410,000 $60,000 $200,000 $150,000 Contribution margin $590,000 $80,000 $300,000 $210,000 Less fixed expenses: Advertising $216,000 $41,000 $110,000 $65,000 Depreciation $95,000 $20,000 $40,000 $35,000 Line supervisors' salaries $19,000 $6,000 $7,000 $6,000 General factory overhead* $200,000 $28,000 $100,000 $72,000 Total fixed expenses $530,000 $95,000 $257,000 $178,000 Net operating income (loss) $60,000 $(15,000) $43,000 $32,000 *A common fixed cost that is allocated on the basis of sales dollars Analyze the above information to determine if the round heat exchanger should be discontinued. The special equipment that is used to produce the round heat exchanger has no resale value. If the round heat exchanger is discontinued, the two line supervisors who are assigned to the model would be discharged. Overall Manufacturing Company has no other use for the capacity that is now being used to produce the round heat exchanger. Include the following in your analysis: Should the production and sale of the round heat exchanger be discontinued? Show your analysis to support your answer. How might this same information be presented to make it more useful to management in assessing the long-run profitability of its various product lines? What policy change would you recommend to management?

Explanation / Answer

Profitability of the company if round style heat exchangers are discontinued :

Total

$

Round

$

Rectangular

$

Octagonal

$

By discontinuing Round heat exchangers, the overall profit of $60,000 if reduced to $47,000.

Product Round heat exchangers are to be continued to minimize the loss.

Note:

Particulars

Total

$

Round

$

Rectangular

$

Octagonal

$

Sales 860,000 - 500,0000 360,000 Less: Variable cost 350,000 - 200,000 150,000 Contribution 510,000 - 300,000 210,000 Fixed expenses Advertising expenses 175,000 - 110,000 65,000 Depreciation 75,000 - 40,000 35,000 Line Supervisor 13,000 - 7,000 6,000 General Factory Overheads 200,000 28,000 100,000 72,000 Net income(loss) 47,000 (28,000) 43,000 32,000

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.