Question

The management of Ismail Manufacturing Corporation is considering dropping product M12C. Data from the company's accounting system appear below:

Sales	$550,000
Variable expenses	$242,000
Fixed manufacturing expenses	$250,000
Fixed selling and administrative expenses	$150,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $170,000 of the fixed manufacturing expenses and $90,000 of the fixed selling and administrative expenses are avoidable if product M12C is discontinued.

Determine the financial advantage (disadvantage) for the company of dropping product M12C. Should the product be dropped? Show your work!

Answer 1

	Continue	Discontinue	Increase/Decrease in Income
Sales	550,000	0	-550,000
Variable expense	-242,000	0	242,000
Fixed manufacturing expenses	-250,000	-80,000	170,000
Fixed selling and administrative expenses	-150,000	-60,000	90,000
Total cost	($92,000)	($140,000)	($48,000)

Product M12C should not be dropped.

Net incremental advantage of continuing = $48,000

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