Nimoy Company makes three models of phasers. Information on the three products is given below.
Fixed expenses consist of $307,400 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $29,461 (Stunner), $74,366 (Double-Set), and $29,897 (Mega-Power). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a model is phased out.
Mr. Spock, an executive with the company, feels the Mega-Power line should be discontinued to increase the company's net income.
(a) Compute current net income for Nimoy Company.
(b) Compute net income by product line and in total for Nimoy Company if the company discontinues the Mega-Power product line.
Discontinuing a Product-Line:
In order to calculate the financial effect that discontinuing a product will have, only the avoidable costs should be used. Common, allocated overhead costs are often not avoidable so it should be ignored.
Answer and Explanation:
a.) The current net income is:
b.) The net income will be:
|Fixed expenses - Direct||29,461||74,366||0||103,827|
|Common fixed expenses||307,400|
Learn more about this topic:
from Accounting 301: Applied Managerial AccountingChapter 9 / Lesson 12