The management of Zorrilla Corporation is considering dropping product R10C. Dat
ID: 2371886 • Letter: T
Question
The management of Zorrilla Corporation is considering dropping product R10C. Data relating to Product R10C from the company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $42,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product R10C is discontinued.
The management of Zorrilla Corporation is considering dropping product R10C. Data relating to Product R10C from the company's accounting system appear below:
Explanation / Answer
Prsent status :
Sales $260,000
Less Var exp $125,000
-------------------------
Total Cont 135,000
Less FCs:
Fixed mfg exp $88,000
Fixed S&A exp $75,000 163,000
-----------------------------------
Net Loss (28,000) .....(A)
Post droopping R10C :
Sales 0
Less Var exp 0
-------------------------
Total Cont 0
Less FCs:
Fixed mfg exp ($88,000-42000) 46,000
Fixed S&A exp ($75,000-48000)27,000
-----------------------------------
Net Loss (73,000) ....(B)
SO if R10C is discont, Net loss will increase from 28000 to 73000
ie Increase of 73000-28000 = 45,000
So Net Op Income will decrease by 45000
.. Option (IV) is correct
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