Question

The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system for this product for last year appear below: Sales $ 830,000 Variable expenses $ 390,000 Fixed manufacturing expenses $ 266,000 Fixed selling and administrative expenses $ 232,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued. What would be the financial advantage (disadvantage) from dropping product D74F?

Answer 1

Answer:

the financial disadvantage of dropping D74F = $226,000. This means that if the company drops D74F, its operating income will decrease by $226,000.

Explanation:

income from product D74F = $830,000 - $390,000 - $266,000 - $232,000 = -$58,000

unavoidable costs = ($266,000 - $111,000) + ($232,000 - $103,000) = $284,000

the financial disadvantage of dropping D74F = total unavoidable costs - net loss = $284,00 - $58,000 = $226,000.