Question

The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below:
Sales $ 950,000
Variable expenses $ 380,000
Fixed manufacturing expenses $ 362,000
Fixed selling and administrative expenses $ 242,000
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $217,000 of the fixed manufacturing expenses and $178,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued.
1. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be______:
Multiple Choice
A. $(34,000)
B. $175,000
C. $34,000
D. $(175,000)

Answer 1

Answer:

Sales                                                                              950,000

Less: Relevant cost:

Variable expenses                                                         380,000

Avoidable fixed manufacturing expenses                    217,000

Avoidable fixed selling and administrative expenses  178,000

Contribution                                                                    175,000

The total profit of Furrow Corporation reduces by $175,000 if the product is discontinued.

Explanation:

In this question, there is need to determine contribution, which is the excess of sales over relevant costs. Relevant costs are comprised of variable cost and avoidable fixed costs. The product should not be discontinued since the contribution is positive. Deleting a product with positive contribution reduces the total profit of the company by the amount of positive contribution.