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den301095 [7]
2 years ago
5

The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system for this pro

duct for last year appear below: Sales $ 942,000 Variable expenses $ 415,000 Fixed manufacturing expenses $ 356,000 Fixed selling and administrative expenses $ 263,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $217,000 of the fixed manufacturing expenses and $128,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued. What would be the financial advantage (disadvantage) from dropping product D74F
Business
1 answer:
xenn [34]2 years ago
5 0

Answer:

Financial disadvantage from dropping = $(182,000)

Explanation:

<em>A product should be shut down if doing so would make the savings in fixed costs associated with the product to exceed the lost contribution. Other wise , the product should remain.</em>

In a shut down decision , the following relevant cash flows should be considered:

1. Lost contribution from the product to be shut down

2. Savings in fixed directly attributable to the product under consideration.

So, we will apply these principles as follows:

Lost contribution from the product to be shut down:

(942,000-415,000)                                                                 (527,000)

Savings from fixed direct fixed cost:

(217,000+128,000)                                                                 <u>  345,000</u>

Net loss contribution                                                            <u>  (182,000)   </u>    

Financial disadvantage from dropping = $(182,000)                                                  

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