Question

Suire Corporation is considering dropping product D14E. Data from the company's accounting system appear below:

Sales $ 800,000
Variable expenses $ 381,000
Fixed manufacturing expenses $ 263,000
Fixed selling and administrative expenses $ 211,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $202,500 of the fixed manufacturing expenses and $117,500 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

Answer and Explanation:

a. The computation of the net operating income earned is shown below:

Sales $800,000

Less: Variable cost -$381,000

Contribution margin $419,000

Less: Fixed manufacturing expenses - $263,000

Less : Fixed selling and administrative expenses - $211,000

Net operating income or (Loss) -$55,000

b. The computation of the financial advantage (disadvantage) of dropping product D14E is shown below:

Sales $800,000

Less: Variable cost -$381,000

Contribution margin $419,000

Less: Fixed manufacturing expenses - $202,500

Less : Fixed selling and administrative expenses - $117,500

Financial disadvantage -$99,000

Since there is a financial disadvantage so the product should not be dropped

We simply applied the above equation