Question

Smyth Corporation is considering dropping product C78D. Data from the company's accounting system appear below:

Sales	$	803,200
Variable expenses	$	417,300
Fixed manufacturing expenses	$	273,000
Fixed selling and administrative expenses	$	233,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $193,000 of the fixed manufacturing expenses and $167,300 of the fixed selling and administrative expenses are avoidable if product C78D is discontinued.

Required:

What would be the financial advantage (disadvantage) of dropping C78D? Should the product be dropped?

Answer 1

	Computation of financial advantage and dis advance of droppingC78D
	Cell Reference	Particulars	Amount ($)
	A	Sales	803,200
	B	Variable expenses	417,300
	C	Avoidable fixed manufacturing expenses (Note:-1)	193,000
	D	Avoidable selling and administrative expenses (Note:-1)	167,300
	E=A-B-C-D	Profit	25,600
	(Note:-1)	Fixed expenses
		Particulars	Total fixed cost	Avoidable	Non Avoidable
		fixed manufacturing expenses	273,000	193,000	80,000
		selling and administrative expenses	233,000	167,300	65,700
		Non avoidable fixed cost should not be considered in decision making as that cost has to be incurred by the Company whether the company discontinue the product or not
	Conclusion	so based on the above computation we can conclude that the Company should not discontinue the C78D as there is profit of $ 25,600 from the sale of C78D