Question

The management of Furrow Corporation is considering dropping product L07E. Data from the company's budget for the upcoming year appear below: Sales $ 980,000 Variable expenses $ 383,000 Fixed manufacturing expenses $ 365,000 Fixed selling and administrative expenses $ 245,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $223,000 of the fixed manufacturing expenses and $184,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

Answer 1

Answer:

If product L07E is discontinued, income will decrease by $190,000

Explanation:

Giving the following information:

Current loss= (13,000)

Further investigation has revealed that $223,000 of the fixed manufacturing expenses and $184,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued.

To determine whether product L07E should be discontinued or not, we need to use the following formula:

Effect on income=  Unavoidable fixed cost - current income

Effect on income= - 203,000 + 13,000

Effect on income= -$190,000

If product L07E is discontinued, income will decrease by $190,000