8) The management of Leinberger Corporation is considering dropping product $48J

Question

8) The management of Leinberger Corporation is considering dropping product $48J. Data from the company's accounting system appear below: $120,000 $64,000 S38,000 $30,000 Fixed manufacturing expenses Fixed selling and administrative expenses.... All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $28,000 of the fixed manufacturing expenses and $21,000 of the fixed selling and administrative expenses are avoidable if product S48J is discontinued. Required: What would be the effect on the company's overall net operating income if product S48J were dropped? Should the product be dropped? Show your work!

Explanation / Answer

Total sales of S48J product = 120000

Variable expenses = 64000

Avoidable fixed manufacturing expenses = 28000

Avoidable fixed selling and administrative expenses = 21000

Net profit from product S48J = 120000 - 64000 - 28000 - 21000 = 7000

Unavoidable fixed manufacturing expenses = 38000 - 28000 = 10000

Unvoidable fixed selling and administrative expenses = 30000 - 21000 = 9000

Net unavoidable fixed expenses = 10000+9000 = 19000

Unavoidable fixed expenses of $19000 is irrelevant in the context of decision making with regard to production of product S48J because it will be incurred whether product S48J is manufactured or not.

So, If product S48J were dropped then company's overall net operating income will be reduced by $7000. So, the production of the product S48J should not be stopped.

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