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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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  1. 26 January, 06:04
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    -$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
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