Question

Jay Corp fully allocates fixed expenses to its products and had the following results for product x:

Sales 400

Variable expenses 320

Fixed manufacturing expenses 80

Fixed Selling & Admin exp 50

Operating income/loss -50

$60 of fixed manufacturing costs and $40 of fixed selling and administrative costs are avoidable if product x is discontinued. The remaining fixed manufacturing costs will not go away.

What is the financial impact of discontinuing product x?

Should Jay keep or discontinue product x?

Answer 1

Part a) Financial Impact of Discontinuing Product X

Unavoidable Fixed cost will be incurred

Fixed manufacturing costs--------------20

Fixed selling and administration------10

Total unavoidable fixed costs =30

Operating loss of 50 will not occur which was due to Product X.

Hence, Total 50-30 = $ 20 loss saved due to discontinuation

Now, only $30 will be incurred due to unavoidable fixed costs.

Part b) If manufacture product X------Loss of $50

If discontinue product X--------Loss of $30

Hence, on discontinuation loss is lower by $20 , therefore product X should be DISCONTINUED.