Question

The management of Austin Corporation is considering dropping product A1B2. Data from the company’s budget for the upcoming year appear below: Sales $ 930,000 Variable expenses $ 389,000 Fixed manufacturing expenses $ 371,000 Fixed selling and administrative expenses $ 251,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $235,000 of the fixed manufacturing expenses and $196,000 of the fixed selling and administrative expenses are avoidable if product A1B2 is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

Answer 1

Answer:

The financial disadvantage would be of 350,000

Explanation:

$\left[\begin{array}{cccc}& Continued& Discontinued& Differential\\ Sales&930,000&0&-930,000\\ Variable&-389,000&0&389,000\\ Fixed&-371,000&-235,000&136,000\\ Allocate cost&-251,000&-196,000&55,000\\ Result&-81,000&-431,000&-350,000\\\end{array}\right]$

The product is generating a contribution, their sales revenue is greater than his variable cost. This generates a contribution which pays enough fixed cost to be above close point

It is better to continue the production of A1B2