Question

The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below:

Sales	$	950,000
Variable expenses	$	396,000
Fixed manufacturing expenses	$	378,000
Fixed selling and administrative expenses	$	258,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $249,000 of the fixed manufacturing expenses and $210,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

Multiple Choice

• $(82,000)

• $95,000

• $82,000

• $(95,000)

Answer 1

Correct option is: ($95000)
Workings:
	Continued Product line	Discontinued Product line	Net Change
	(i)	(ii)	(ii) - (i)
Sales revenue	$           9,50,000	$                                   -	$ -9,50,000
Variable costs	$           3,96,000	$                                   -	$ -3,96,000
Contribution margin	$           5,54,000	$                                   -	$ -5,54,000
Fixed costs
Fixed manufacturing expenses	$           3,78,000	$                      1,29,000
Fixed selling and administrative expenses	$           2,58,000	$                          48,000
Operaing Income	$             -82,000	$                    -1,77,000	$     -95,000