In: Accounting
The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below:
Sales | $ | 970,000 |
Variable expenses | $ | 393,000 |
Fixed manufacturing expenses | $ | 375,000 |
Fixed selling and administrative expenses | $ | 255,000 |
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $243,000 of the fixed manufacturing expenses and $204,000 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
$130,000
$(130,000)
$53,000
$(53,000)
ANSWER:
Option a is the correct option i.e. $130,000
If the product is discontinued, there will be no sales and variable costs,
but unavoidable fixed costs will remain as it is and the organization will have to bear this cost
Unavoidable Fixed costs of manufacturing= Total manufacturing fixed costs – Avoidable fixed costs
Unavoidable Fixed costs of manufacturing = $375,000 - $243,000
Unavoidable Fixed costs of manufacturing= $132,000
Unavoidable Fixed selling and administrative expenses
Unavoidable Fixed selling and administrative expenses= $255,000 - $204,000
Unavoidable Fixed selling and administrative expenses= $51,000
Calculations | Particulars | Current | Proposed |
A | Sales | 970,000 | - |
B | Variable expenses | 393,000 | - |
C = A-B | Contribution | 577,000 | - |
D | Fixed manufacturing expenses | 375,000 | 132,000 |
E | Fixed selling and administrative expenses | 255,000 | 51,000 |
F = C-D-E | Net Income | (53,000) | (183,000) |
As we can find from the above calculations, the losses will increase from $53,000 to $183,000 which will result in increase in losses by $130,000 ($183,000 - $53,000)
So, option 1 is the correct option.