The management of Thors Corporation is considering dropping product F275. Data from the company's...

Question:

The management of Thors Corporation is considering dropping product F275. Data from the company's accounting system appear below.

Sales $700,000
Variable Expenses $380,000
Fixed Manufacturing Expenses $195,000
Fixed Selling and Administrative Expenses $150,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $75,000 of the fixed manufacturing expenses and $25,000 of the fixed selling and administrative expenses are avoidable if product F275 is discontinued.

Required:

i. What is the net operating income earned by product F275 according to the company's accounting system? Show your work!

ii. What would be the effect on the company's overall net operating income of dropping product F275? Should the product be dropped? Show your work!

(Points : 15)

Impact of Dropping a Product:

The financial effect that dropping a product will have can be calculated subtracting the avoidable costs and expenses from the loss in sales revenue. It will, however, not be the same as the product's operating income as per the income statement, because not all costs are avoidable.

Answer and Explanation:


i. The net operating income earned by product F275 according to the company's accounting system is:

Sales $700,000
Variable Expenses $380,000
Fixed Manufacturing Expenses $195,000
Fixed Selling and Administrative Expenses $150,000
Net operating income (loss) product F275 $(25,000)


ii. The effect on the company's overall net operating income of dropping product F275 would be:

Loss in Sales $(700,000)
Saving in Variable Expenses $380,000
Saving in Avoidable Fixed Manufacturing Expenses 75,000
Saving in Avoidable Fixed Selling and Administrative Expenses 25,000
Decrease in Net operating income if Product F275 is dropped $220,000


The product should NOT be dropped.


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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