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	$	392,000
Fixed manufacturing expenses	$	374,000
Fixed selling and administrative expenses	$	254,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $241,000 of the fixed manufacturing expenses and $202,000 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:

Answer 1

Loss of contribution		$ 5,68,000.00
Less: Avoidable Fixed cost
Avoidable Manufacturing fixed cost	$ 2,41,000.00
Avoidable Fixed selling cost	$ 2,02,000.00
Total Avoidable fixed cost		$ 4,43,000.00
Net Financial Disadvantage if Product L07E is dropped		$ 1,25,000.00

Contribution margin =$960000-392000

Answer--- Financial Disadvantage =$125000

Unavoidable fixed cost is not considered to be a relevant cost since it will be accrued even if no production is done.

Avoidable fixed on the other hand is a saving if a particular product is discontinued.

In the above case Contribution loss less avoidable fixed cost will be net disadvantage of discontinuing product.