In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $186,000 of the fixed manufacturing expenses and $106,000 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:

Question

Lisa Miller

Business

26 January, 05:45

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $186,000 of the fixed manufacturing expenses and $106,000 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:

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Brylee Mcclure · Answer 1

-$173,000

Explanation:

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

But before that first we have to find the net operating income

Sales $830,000

Less:Variable expenses - $365,000

Contribution margin $465,000

Less:Fixed manufacturing expenses - $291,000 477

Less:Fixed selling and administrative expenses - $166,000 272

Net operating income $8,000

Now

Fixed manufacturing expense unavoidable is

= $291,000 - $186,000

= $105,000

And,

Fixed selling and administrative expense unavoidable is

= $166,000 - $106,000

= $60,000

Total expenses unavoidable=$266000

Hence financial disadvantage is

= - $105,000 - $60,000 - $8,000

= - $173,000