Question

The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below:Sales $950,000Variable expenses $380,000Fixed manufacturing expenses $362,000Fixed selling and administrative expenses $242,000In 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. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:Multiple ChoiceA. $(34,000)B. $175,000C. $34,000D. $(175,000)

Answer 1

Answer:

D. $(175,000)

Explanation:

We know that,

The profit or loss would be

= Sales - Total cost

In the first case, the profit or loss would be

= Sales - variable expense - Fixed manufacturing expenses - Fixed selling and administrative expenses

= $950,000 - $380,000 - $362,000 - $242,000

= -$34,000

Now in the second case, it would be

= Sales - Difference in fixed manufacturing expenses + Difference in fixed selling and administrative expenses

= $0 -  ($362,000 - $217,000) + ($242,000 - $178,000)

= $0 - $145,000 + $64,000

= - $209,000

So, the financial disadvantage would be

= - $209,000 - (-$34,000)

= - $175,000