The management of Thews Corporation is considering dropping product E281. Data f
ID: 2589684 • Letter: T
Question
The management of Thews Corporation is considering dropping product E281. Data from the g system appear below: Sales $480,000 Variable expenses $202,000 Fixed manufacturing expenses. $158,000 Fixed selling and administrative expens. $130,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $86,000 of the fixed manufacturing expenses and $67,000 of the fixed selling and administrative expenses are avoidable if product E28I is discontinued Required: a. What is the net operating income earned by product E28I according to the company's accounting system? Show your work! b. What would be the effect on the company's overall net operating income of dropping product E281? Should the product be dropped? Show your work!Explanation / Answer
a & b Keep the product Drop the product Difference Sales $480,000 $0 -$480,000 Variable expenses $202,000 $0 -$202,000 Contribution Margin $278,000 $0 -$278,000 Fixed Expenses: Fixed manufacturing expense $158,000 $72,000 $86,000 Fixed selling and administrative expense $130,000 $63,000 $67,000 Total Fixed expense $288,000 $135,000 $153,000 Net operating income (Loss) -$10,000 -$135,000 -$431,000 Net Operating income would decline by $431,000 if product E28I , So product should not be dropped
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