Question

XYZ manufactures and sells a number of products, including Product G. Results for last year for...

XYZ manufactures and sells a number of products, including Product G. Results for last year for the manufacture and sale of Product G are as follows:

Sales

$50,000

Less expenses:

    Variable costs

$40,000

    Fixed costs

36,000

76,000

Net operating loss

$(26,000)

XYZ is trying to decide whether or not to discontinue Product G. Two thirds of fixed costs are avoidable if the product is dropped. Assume that dropping Product G will have no effect on other products. What is the financial advantage (disadvantage) of dropping Product G?

A.

$26,000 financial advantage

B.

$2,000 financial advantage

C.

$40,000 financial advantage

D.

$14,000 financial advantage

Homework Answers

Answer #1

Fixed costs = $36,000

Avoidable fixed costs = 36,000 x 2/3

= $24,000

Unavoidable fixed costs = Fixed costs - Avoidable fixed costs

= 36,000 - 24,000

= $12,000

Differential analysis

Continue product G Discontinue product G Increase/Decrease in income
Sales 50,000 0 - 50,000
Variable costs - 40,000 0 40,000
Fixed costs - 36,000 - 12,000 24,000
Net operating loss/Income - 26,000 - 12,000 14,000

Financial advantage of dropping Product G = $14,000 financial advantage

Correct option is (D)

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