Question

Ankeil Corp. is deciding whether to keep or drop product SL412. Data from the company's accounting system regarding the product is as follows: Sales $ 700,000 Variable expenses $ 300,000 Fixed manufacturing expenses $ 252,000 Fixed selling and administrative expenses $ 200,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. If product SL412 is discontinued, $197,500 of the fixed manufacturing expenses and $112,500 of the fixed selling and administrative expenses are avoidable. Required: a. According to the company's accounting system, what is the net operating income earned by product SL412? (Net losses should be indicated by a minus sign.) b. What would be the financial advantage (disadvantage) of dropping product SL412? Should the product be dropped?
C)	No	Yes
D)	No	No

Answer 1

Answer
a.
Particulars	Amount
Sales	$             700,000
Less: Variable expenses	$             300,000
Contribution margin	$             400,000
Fixed manufacturing expenses	$             252,000
Fixed selling and admin expenses	$             200,000
Total fixed costs	$             452,000
Net operating Income	-$               52,000
b.
Total fixed costs = 452,000
Less: Avoidable fixed costs = 310,000
Unavoidable fixed costs = 142,000
If the product is discontinued then net operating income that is decrease = contribution margin + unavoidable fixed costs
400,000 + 142,000
$542,000
Financial advantage of 542,000 if the product is not dropped.