Question

Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether. Data from the company’s budget for the upcoming year appear below:Sales.................................................................$730,000Variable expenses.............................................$350,000Fixed manufacturing expenses.........................$234,000Fixed selling and administrative expenses........$161,000In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling and administrative expenses are avoidable if product U23N is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

Answer 1

Answer:

                                 Product U23N

                                                                                          $

        Sales                                                                     730,000

Less: Variable cost                                                        350,000

         Contribution                                                          380,000

Less: Avoidable fixed manufacturing expenses           144,000

         Avoidable fixed selling and administrative cost  93,000

         Net contribution                                                     143,000

Product U23N should not be discontinued because it has a positive contribution. If the company discontinued the product, the total profit of the company reduces by $143,000.

Explanation:

In this case, we need to determine the net contribution of the product.  Net contribution is the excess of sales over variable cost and avoidable fixed cost. Product U23N should not be discontinued because it has a positive net contribution. If the product is deleted, there will be a reduction in total profit of the company by $143,000.