The management of Parachute Corporation is considering dropping product ABC123.

Question

The management of Parachute Corporation is considering dropping product ABC123. Data from the company's accounting system appear below:

All building expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $42,000 of the building expenses and $48,000 of the selling and administrative expenses will not be incurred if product ABC123 is discontinued.

a. According to the company's accounting system, what are the operating profits earned by product ABC123?
b. What would be the impact on the company's overall operating profits if product ABC123 is dropped? Should the product be dropped?

Sales $ 260,000 Cost of goods sold 125,000 Building expenses 88,000 Selling and administrative expenses 75,000

Explanation / Answer

Answer a) Operating Profit of Products ABC 123 is,

Sales 260000 $

Less: Cost of Goods sold (125000 $)

Building Expenses (88000 $)

Selling and Administrative Expenses (75000 $)

Operating Profit/( Loss) ( 28000 $)   

Answer 2 ) If operating profit of Product ABC 123 Dropped,

Sales 260000 $

Less: Cost of Goods sold (125000 $)

Building Expenses (46000 $)

Selling and Administrative Expenses (27000 $)

Operating Profit/( Loss) 62000 $

if Product ABC 123 Dropped oprating Pdofit will be Incresed by 90000 $ ( 62000- (28000))

Should Accepted, Discontinuance of Product ABC123.

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