Dexter Products, Inc., manufactures and sells a number of items, including an ov
ID: 2446539 • Letter: D
Question
Dexter Products, Inc., manufactures and sells a number of items, including an overnight case. The company has been experiencing losses on the overnight case for some time, as shown on the following contribution format income statement:
Discontinuing the overnight cases would not affect the company’s sales of its other product lines, its total general factory overhead, or its total purchasing department expenses.
Compute the increase or decrease of net operating income if the overnight case are continued or discontinued.
Dexter Products, Inc., manufactures and sells a number of items, including an overnight case. The company has been experiencing losses on the overnight case for some time, as shown on the following contribution format income statement:
Explanation / Answer
The company should not discontinue the manufacture and sale of overnight cases.
Reason:- Contribution from Overnight cases is 260000. If we discontiue the overnight cases,we will loose this contribution. The other fixed costs given in the question (Salary of product-line manager, General factory overhead,Depreciation of equipment,Advertising,Insurance on inventories,Purchasing department etc.)will definitely be incurred whether we continue or not the overnight cases. So these fixed costs will not be taken into consideration while deciding about whether we should continue or not the overnight cases.
As the contribution from overnight cases is positive, therfore, we should continue the overnight cases. (Contribution approach)
If we continue the overnight cases, we will have an additional contribution of $260,000 i.e. Net operating income increased by this $260,000 & If we discontinue the overnight cases,we will loose this contribution i.e.Net operating income decreased by this $260,000.
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