The management of Furrow Corporation is considering dropping product LO7E. Data

Question

The management of Furrow Corporation is considering dropping product LO7E. Data from the company's budget for the upcoming year appear below: Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses $830,000 $365,000 $291,000 $166,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product LO7E is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

Explanation / Answer

Loss in Contribution margin -465000 =365000-830000 Avoidable costs: Fixed manufacturing expenses 186000 Fixed selling and administrative expenses 106000 Financial advantage (disadvantage) -173000 Option 2 is correct

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