Question

Smyth Corporation is considering dropping product C78D. Data from the company's accounting system appear below:

Sales	$	803,200
Variable expenses	$	417,300
Fixed manufacturing expenses	$	273,000
Fixed selling and administrative expenses	$	233,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $193,000 of the fixed manufacturing expenses and $167,300 of the fixed selling and administrative expenses are avoidable if product C78D is discontinued.

What would be the financial advantage (disadvantage) of dropping C78D? Should the product be dropped?

Answer 1

a.Calculation of net income (loss)
	Amount($)
Sales	8,03,200
Less: Variable expenses	4,17,000
Fixed manufacturing expenses	2,73,000
Fixed selling and administrative expenses	2,33,000
Net Income (loss)	-1,19,800
b. net income (loss) if the product is dropped.
	Amount($)
Sales	nil
variable expenses	nil
fixed manufacturing expense (unavoidable) [273,000 - 193,000]	-80,000
fixed selling and administrative expense [233,000 - 167,300]	-65,700
Net Income	-1,45,700
the financial DISADVANTAGE [145,700 - 1,19,800 =>$25,900] .
the product shall not be dropped.