Question

In: Accounting

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

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?

Solutions

Expert Solution

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

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