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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. $40,000 financial advantage B. $26,000 financial advantage C. $14,000 financial advantage D. $2,000 financial advantage

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Answer #1
Differential Analysis
Continue product G Discontinue product G Increase/ Decrease in income
sales 50,000 0 -50,000
Variable costs -40,000 - 40,000
Fixed costs -36,000 -12,000 24,000
Net operating loss/income -26,000 -12,000 14,000

Financial advantage of dropped product G = $14,000 financial advantage

Correct option is C.

Working:

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

Please give a positive rating if you are satisfied with this solution and if you have any query kindly ask.Thanks!!!

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