Question

The management of Pooh Corporation is considering dropping product HNY. Data from the company's accounting system appear below:

Sales	$	840,700
Variable expenses	$	436,800
Fixed manufacturing expenses	$	285,600
Fixed selling and administrative expenses	$	243,800

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $202,000 of the fixed manufacturing expenses and $175,100 of the fixed selling and administrative expenses are avoidable if product HNY is discontinued.

Required:

1. What would be the financial advantage (disadvantage) of dropping HNY?

Answer 1

Financial Disadvantage of $26,800 will be the result as the Loss is higher when the division is discontinued.

Particulars	Continue option	Discontinue option
Sales	840700	0
Variable Expenses	436800	0
Fixed Manufacturing Expense (Note)	285600	83600
Profit/(Loss)	118300	-83600
Fixed Selling & Administrative Expense (Note)	243800	68700
Net Profit	-125500	-152300

Net Loss is 125,500 when the division is continued and 152,300 when division is discontinued. So, the financial disadvantage will be $26,800

Note:

1. Fixed Manufacturing Expense is reduced by 202,000 while discountinuing. (285,600-202,000 = 83,600)

2. Fixed Selling & Admin Expense is reduced by 175,100 while discontinuation, (243,800-175,100 = 68700)