Question

Suire Corporation is considering dropping product D14E. Data from the company's accounting system appear below: Sales $ 740,000 Variable expenses $ 341,000 Fixed manufacturing expenses $ 257,000 Fixed selling and administrative expenses $ 205,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $199,500 of the fixed manufacturing expenses and $114,500 of the fixed selling and administrative expenses are avoidable if product D14E is discontinued. Required: a. 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.) b. What would be the financial advantage (disadvantage) of dropping product D14E? Should the product be dropped?

Answer 1

Sales	740000
Variable expenses	341000
Contribution margin	399000
Fixed expenses:
Fixed manufacturing expenses	257000
Fixed selling and administrative expenses	205000
Total fixed expenses	462000
Net operating income (loss)	-63000
a
Net operating loss $63000
b
Loss in Contribution margin	-399000
Avoidable fixed expenses	314000	=199500+114500
Financial (disadvantage)	-85000
No product should not be dropped