Question

Suire Corporation is considering dropping product D14E. Data from the company's accounting system appear below:

Sales	$	800,000
Variable expenses	$	381,000
Fixed manufacturing expenses	$	263,000
Fixed selling and administrative expenses	$	211,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $202,500 of the fixed manufacturing expenses and $117,500 of the fixed selling and administrative expenses are avoidable if product D14E is discontinued.

Required:

Please complete the following table: (no decimals)

According to the company's accounting system, what is the net operating income earned by product D14E? (Net losses should be indicated by a minus sign.)	$
What would be the financial advantage (disadvantage) of dropping product D14E? (indicate an advantage as a positive or a disadvantage with a minus)
Should the product be kept or dropped?

Answer 1

1
Sales	800000
Expenses:
Less: Variable expenses	381000
Less: Fixed manufacturing expenses	263000
Less: Fixed selling and administrative expenses	211000
Net operating income (loss)	(55000)
2
Loss in Contribution margin	(419000)	=381000-800000
Avoidable fixed expenses:
Fixed manufacturing expenses	202500
Fixed selling and administrative expenses	117500
Net change in income	(99000)
Financial (disadvantage) (99000)
The product should be kept, not dropped