Question

A study has been conducted to determine if Product A should be dropped. Sales of the product total $500,000; variable expenses total $340,000. Fixed expenses charged to the product total $210,000. The company estimates that $60,000 of these fixed expenses are not avoidable even if the product is dropped. If Product A is dropped, the annual financial advantage (disadvantage) for the company of eliminating this product should be:
(A) ($10,000)
(B) $10,000
(C) ($50,000)

Answer 1

Answer:

(A) ($10,000)

Explanation:

This is the actual situation with the product A on production.

500.000,00  Sales of the product total

-340.000,00  variable expenses total

-210.000,00  Fixed expenses charged to the product total  

-50.000,00  Income

If the product A is dropped the company not loose anymore the ($50,000) of income but the company must pay the $60,000 of fixed expenses, so the company will have a disadvantage of ($10,000).