Question

The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below:Sales $938,000Variable expenses $413,000Fixed manufacturing expenses $525,000Fixed selling and administrative expenses $352,000All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $215,000 of the fixed manufacturing expenses and $126,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued.What would be the effect on the company's overall net operating income if product V41B were dropped?

Answer 1

Answer:

if dropped the differential loss will be of 184,000

the income will decrease 184,000

It is better to continue with the production.

Explanation:

$\left[\begin{array}{cccc}& Continued& Discontinued& Differential\\ Sales&938,000&-&-938,000\\ Variable&-413,000&-&413,000\\ Avoidable&-341,000&-&341,000\\ Allocate cost&-536,000&-536,000&-\\ Result&-352,000&-536,000&-184,000\\\end{array}\right]$

If dropped sales and variable expenses will be zero.

We will determinate the avoidable cost:

215,000 manufacting + 126,000 S&A = 341,000

and the allocated cost will be:

total fixed cost - avoidable cost

(525,000+352,000) - 341,000 = 536,000