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:

Answer 1

Answer:

$10,000  disadvantage

Explanation:

If  $60,000 of the fixed expenses are not avoidable even if the product is dropped, the total impact on fixed expenses by dropping product A is:

Avoidable fixed expenses = $210,000 - $60,000 =$150,000

Variable expenses = $340,000

Total avoidable expenses = Avoidable fixed expenses + Variable expenses

Total avoidable expenses = $150,000 + $340,000 = $490,000

Sales of Product A = $500,000

The change in cash flow by dropping product A is given by:

C = Total avoidable expenses - Sales of Product A

C= $490,000 - $500,000 = -$10,000

Since the value is negative, there is an annual financial disadvantage of $10,000 for the company by eliminating Product A.