Answer:
See explanation.
Explanation:
In order to find the profitability of D14E we only calculate relevant costs which are incremental and thus can be avoided if D14E was not produced. However as the system allocates complete costs we will take the allocated costs for the first part.
1)
Sales $740,000
Less:
Variable expenses $341,000
Fixed Manufacturing $257,000
Fixed Selling $205,000
Loss as/ system $ -63,000
2)
First we see if the product D14E has positive contribution to fixed costs,
Contribution = Revenue - Variable costs
Contribution D14E = 740,000 - 341,000 = $399,000
The contribution is positive so now we compare it to avoidable fixed costs,
Total Advantage forgone = Contribution - avoidable fixed costs
Advantage forgone = 399,000 - 199,500 - 114,500 = $85,000
Since the product covers all its variable cost and provides a positive contribution even after covering avoidable fixed costs, it should not be dropped as it would be a disadvantage of revenue forgone by $85,000.
Hope that helps.