Question 12 The management of Walsh Corporation has been concerned for some time

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Question 12 The management of Walsh Corporation has been concerned for some time with the financial performance of its product V860 and has considered discontinuing it on several occasions. Data from the company's accounting system for this product for last year appear below: Not yet answered P Flag question Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $30,000 of the fixed manufacturing expenses and $13,000 of the fixed selling and administrative expenses are avoidable if product V860 is discontinued. $150,000 $72,000 $50,000 $33,000 What would be the financial advantage (disadvantage) from dropping product v860? Select one: a. $5,000 O b. ($5,000) O c. ($35,000) Od. $35,000 12

Explanation / Answer

Only those avoidable costs should be considered for decision making.

Profit / (Loss) = Sales – Variable cost – Avoidable fixed manufacturing – Avoidable fixed selling

                        = 150,000 – 72,000 – 30,000 – 13,000

                        = 35,000

If the product is dropped, the amount of profit of $35,000 is gone. Therefore, by dropping there is a disadvantage.

Answer: c

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