Question

The management of Woznick Corporation has been concerned for some time with the financial performance of its product V86O and has considered discontinuing it on several occasions. Data from the company's accounting systemfor this product for last year appear below:
Sales $ 150,000
Variable expenses $ 72,000
Fixed manufacturing expenses $ 50,000
Fixed selling and administrative expenses $ 33,000
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $30,000 of the fixed manufacturing expenses and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is discontinued.
What would be the financial advantage (disadvantage) from dropping product V86O?
a. ($35,000)
b. ($5,000)
c. $35,000
d. $5,000

Answer 1

Answer:

a. ($35,000)

Explanation:

The computation of the financial advantage or disadvantage of dropping product V860 is shown below:

= Sales - Variable cost - Avoidable fixed manufacturing - Avoidable fixed selling

= $150,000 - $72,000 - $30,000 - $13,000

= $35,000

This $35,000 would be a financial disadvantage and the fixed cost should not be considered as it is not held for decision making purpose

Hence, the correct option is a