9. The Clemson Company reported the following results last year for the manufact
ID: 2452106 • Letter: 9
Question
9. The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam.
Sales (6,500 Tams at $130 each) $845,000
Variable cost of sales 390,000
Variable distribution costs 65,000
Fixed advertising expense 275,000
Salary of product line manager 25,000
Fixed manufacturing overhead 145,000
Net loss ($55,000)
Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturiing costs of the company.
If the company discontinues the Tam product line, net operating income (or loss) will decrease by what amount? (Worth 2.5 pts.) SHOW ALL WORK FOR CREDIT!
What are some considerations the companies managers may want to take into account when making the decision to discontinue a product line, department, or other segment? (Worth 1.5 pts. – must list a minimum of three factors.)
Explanation / Answer
Answer: Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines. If the company discontinues the Tam product line, the change in annual operating income (or loss) should be:
Answer: The general principal is that sunk costs are not relevant costs. But, some managers may consider sunk costs to be relevant because they may be concerned about how others will perceive their original decision to incur these costs, and may want to cover up their initial poor judgment. Managers may also feel that they do not want to waste the sunk costs by giving up on the possibility of some benefit from the invested funds, or may continue to believe in potential success despite overwhelming evidence to the contrary. Also, managers may be embarrassed and unwilling to admit they made a mistake.
Particulars Amount ($) Sales 845000 Variable cost of sales 390000 Variable distribution cost 65000 Contribution margin 390000 Traceable fixed expenses-advertising 275000 Traceable fixed expenses-salary of product line manager 25000 Segment margin 90000Related Questions
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