3. (TCO H) The management of Thors Corporation is considering dropping product F
ID: 2421086 • Letter: 3
Question
3. (TCO H) 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)
Sales
$700,000
Variable Expenses
$380,000
Fixed Manufacturing Expenses
$195,000
Fixed Selling and Administrative Expenses
$150,000
Explanation / Answer
Solution:
1.
2.
No, the product should not be dropped, as it would lead to an increase in the loss of $ 245,000 which was only 25,000 when the product was continued.
Sales 700,000 Less: Variable cost 380,000 Contribution 320,000 Less: Fixed cost Manufacturing expenses 195,000 Selling and administrative expenses 150,000 Net income / ( loss ) -25,000Related Questions
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