Question

The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system for this product for last year appear below:

Sales	$	940,000
Variable expenses	$	414,000
Fixed manufacturing expenses	$	354,000
Fixed selling and administrative expenses	$	261,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $216,000 of the fixed manufacturing expenses and $127,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.

What would be the financial advantage (disadvantage) from dropping product D74F?

Garrison 16e Rechecks 2017-11-13, 2017-12-15

Multiple Choice

$183,000

$89,000

($89,000)

($183,000)

Answer 1

SOLUTION

Financial disadvantage of ($183,000).

	Keep the product ($)	Drop the product ($)	Difference ($)
Sales	940,000	0	(940,000)
Variable expense	414,000	0	414,000
Contribution margin	526,000	0	(526,000)
Fixed expense:
Fixed manufacturing expenses	354,000	138,000	216,000
Fixed selling and administrative expenses	261,000	134,000	127,000
Total fixed expenses	615,000	272,000	343,000
Net operating income (loss)	(89,000)	272,000	(183,000)