State Road Fabricators Inc. is considering eliminating Model A02777 because of l

Question

State Road Fabricators Inc. is considering eliminating Model A02777 because of losses over the past quarter. The past three months of information for Model A02777 are summarized below $470,000 Sales (1,100 units) Manufacturing costs: Direct materials Direct labor ($15 per hour) Overhead 160,000 80,000 150,000 ($80,000) Operating loss Overhead costs are 75% variable and the remaining 25% is depreciation of special equipment for model A02777 that has no resale value. If Model A02777 is dropped from the product line, operating income will A. increase by S80.000 O B. decrease by $80.000 C. increase by $37,500 0 D. decrease by $117,500

Explanation / Answer

Answer:-If Model A02777 is dropped from the product line, the operating income will:- Decrease by $117500 (option D).

Explanation:-

1)- In Overhead costs only variable part (ie- $150000*75%=$112500) will be considered for decision, hence variable cost of overhead cost is relevant cost for taking the decision whether to drop the product line or not.

2)- Fixed part of overhead cost (ie-$150000*25% =$37500is considered as unavoidable cost, it is continue to occur whether to drop the product or not, hence it is sunk cost.

3)- Hence company should not drop the product line.

State Road Fabricators Inc. Income Statement Particulars Amount $ Sales (1000 units) 470000 Less:- Manufacturing costs Direct Materials 160000 Direct Labor 80000 Overhead Variable part ($150000*75%) 112500 Opreating Income 117500

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

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