The management of Wengel Corporation is considering dropping product B90D. Data from the company's accounting system appear below: Sales $ 740,700 Variable expenses $ 384,800 Fixed manufacturing expenses $ 252,000 Fixed selling and administrative expenses $ 215,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $178,000 of the fixed manufacturing expenses and $154,300 of the fixed selling and administrative expenses are avoidable if product B90D is discontinued. Required: What would be the financial advantage (disadvantage) of dropping B90D? Should the product be dropped?

Answer and Explanation:

The computation of the financial advantage or disadvantage is shown below:

But before that, we need to do the following calculations

Net operating income (loss) in case of continuing the product:

Sales $740,700

Less:

Variable expense - $384,800

Fixed manufacturing expense - $252,000

Fixed selling and administrative expense - $215,000

Net operating income (loss) - $111,100

Now

Net operating income (loss) in case of discontinuing the product:

Fixed manufacturing expense ($252,000 - $178,000) - $74,000

Fixed selling and administrative expense ($215,000 - $154,300) - $60,700

Net operating income (loss) - $134,700

So,

Financial disadvantage is

= $111,100 - $134,700

= - $236,00

Since loss is increased by $23,600 so the product should not be dropped