The management of Furrow Corporation is considering dropping product L07E. Data
ID: 2536364 • Letter: T
Question
The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below:
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $237,000 of the fixed manufacturing expenses and $198,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:
1. -74,000
2. 115,000 3. 74,000 4. -115,000
Sales $ 940,000 Variable expenses $ 390,000 Fixed manufacturing expenses $ 372,000 Fixed selling and administrative expenses $ 252,000Explanation / Answer
If the product is discontinued, there will be no sales and variable costs but unavoidable fixed costs will remain as it is and the organization will have to bear this cost
Unavoidable Fixed costs of manufacturing
= Total manufacturing fixed costs – Avoidable fixed costs
= $372,000 - $237,000
= $135,000
Unavoidable Fixed selling and administrative expenses
= $252,000 - $198,000
= $54,000
As we can find from the above calculations, the losses will increase from $74,000 to $189,000 which will result in increase in losses by $115,000 ($189,000 - $74,000)
So, as per above calculations, option 4 is the correct option
Calculations Particulars Current Proposed A Sales 940,000 - B Variable expenses 390,000 - C = A-B Contribution 550,000 - D Fixed manufacturing expenses 372,000 135,000 E Fixed selling and administrative expenses 252,000 54,000 F = C-D-E Net Income (74,000) (189,000)Related Questions
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