Adding and Dropping Product Lines and Other Segments Nutall Corporation is consi

Question

Adding and Dropping Product Lines and Other Segments Nutall Corporation is considering dropping product N28x. Data from the company's accounting system appear below: Sales Variable expenses. Fixed manufacturing expens 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 $199,000 of the fixed manufacturing expenses and $114,000 of the fixed selling and administrative expenses are avoidable if product N28x is discontinued $730,000 $336,000 $256,000 $204,000 1. According to the company's accounting system, what is the net operating income earned by product N28X7 2. What would be the effect on the company's overall net operating income of dropping product N28X? 3. Should the product be dropped? Utilization of a Constrained Resource Redner, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below: Product JKL $80 $60 $90 $50 $40 S55 Selling price Variable costs Fixed $25 8 $22 Grinding machine time (minutes)...10 5 7 Fixed costs are applied to the products on the basis of direct labor hours. Demand for the three products exceeds the company's productive capacity. The grinding machine is the constraint, with only 2,400 minutes of grinding machine time available this week. 4. Given the grinding machine constraint which product should be emphasized? Support your answer with appropriate calculations. 5. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above up to how much should the company be willing to pay for an additional hour of grinding machine time?

Explanation / Answer

Adding and Dropping Product Lines:

1. Net operating income (loss) earned by product N28X = $ 730,000 - $ ( 336,000 + 256,000 + 204,000) = $ (66,000).

2. Effect on company's overall net operating income of dropping product N28X : Decrease of $ 81,000.

Contribution margin lost = $ 730,000 - $ 336,000 = $ 394,000.

Avoidable fixed costs = $ ( 199,000 + 114,000) = $ 313,000.

Overall effect on overall net operating income = $ 313,000 - $ 394,000 = $ (81,000)

3. No, product N28X should not be dropped.

Utilization of a Constrained Resource :

4. Product L should be emphasized, as the contribution margin per unit of the constrained resource is the highest for product L.

5. If demand is unfilled for product L after using up all of the constrained resource, the company should be willing to pay $ 5 x 60 minutes = $ 300 for an additional hour of grinding machine time.

The Make or Buy Decision :

6. $ 41.50 of the unit product cost would be relevant. [ $ 47.90 - $ 6.40 ]

7. Net dollar advantage (disadvantage) of purchasing the part = 10,000 x $ 42.30 - $ ( 10,000 x 41.50 + 39,000) = $ 423,000 - $ 454,000 = $ 31,000.

8. Maximum amount to be paid per unit = Benefit per Unit = ( Total Manufacturing Cost + Opportunity Cost ) / 10,000 = $ ( 415,000 + 39,0000 ) / 10,000 = $ 45.40

J K L Selling Price per Unit $ 80 $ 60 $ 90 Variable Costs per Unit 50 40 55 Contribution Margin per Unit $ 30 $ 20 $ 35 Grinding Machine Time ( Minutes) per Unit 10 5 7 Contribution Margin per Grinding Machine Minute $ 3 $ 4 $ 5

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