Question

The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below:

Sales	$	960,000
Variable expenses	$	381,000
Fixed manufacturing expenses	$	363,000
Fixed selling and administrative expenses	$	243,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $219,000 of the fixed manufacturing expenses and $180,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

Multiple Choice

• $27,000

• $(180,000)

• $(27,000)

• $180,000

Answer 1

avoidable Fixed Expenses = $219000
avoidable Fixed selling and administrative expense = $180,000
Hence,
Unavoidable Fixed manufacturing expense =($363,000 - 219000) =$144,000
Unavoidable Fixed selling and administrative expense =($243,000 - $180,000)=$63,000

Particulars	Current	if dropping product L07E
Sales	$960,000
Less:Variable expenses	$381,000
Contribution margin	$579,000
Less:Fixed manufacturing expenses	$363,000	$144,000
Less:Fixed selling and administrative expenses	$243,000	$63,000
Net operating income	($27,000)	($207,000)

here we can see, losses will increase from $27,000 to $207,000

Hence financial disadvantage for the company of eliminating this product for the
upcoming year would be: ($207,000 - $27,000) = ($180.000).

$(180,000) is the Right Answer