In: Accounting
95)
Assume that a company manufactures and sells a variety of
products, one of which it refers to as Product A. The company is
considering dropping Product A because the income statement for
this product is reporting a net operating loss as shown
below:
Sales | $ | 500,000 | ||||
Variable expenses: | ||||||
Variable manufacturing expenses | $ | 240,000 | ||||
Sales commissions | 75,000 | |||||
Shipping | 25,000 | |||||
Total variable expenses | 340,000 | |||||
Contribution margin | 160,000 | |||||
Fixed expenses: | ||||||
Salary of product-line manager | $ | 65,000 | ||||
Advertising for this product | 35,000 | |||||
General factory overhead | 25,000 | |||||
Depreciation on equipment | 20,000 | |||||
Insurance on this product’s inventories | 8,000 | |||||
Purchasing department | 15,000 | |||||
Total fixed expenses | 168,000 | |||||
Net operating loss | $ | (8,000 | ) | |||
If Product A is dropped, the company would transfer its
product-line manager to another department and discontinue a search
for a new manager that the company anticipated paying a salary of
$46,000. The general factory overhead and purchasing department
expenses are common costs that the company allocates to all of its
products using total sales dollars as the allocation base. The
equipment used to manufacture Product A does not wear out through
use and it has no resale value. What is the financial advantage
(disadvantage) of dropping Product A?
Multiple Choice
$(31,000)
$(71,000)
$8,000
$(51,000)