2. The management of Schmader Corporation is considering droppingproduct M12C. D

Question

2. The management of Schmader Corporation is considering droppingproduct M12C. Data from the company’s accounting systemappear below:
sales…………………………………………………………..$550,000
variableexpenses……………………………………...$242,000
fixed manufacturingexpenses………………..…$215,000
fixed selling and administrative expenses….$132,000

all fixed expenses of the company are fully allocated to productsin the company’s accounting system., Further investigationhas revealed that $137,000 of the fixed manufacturing expenses and$79,000 of the fixed selling and administrative expenses areavoidable if product M12C is discontinued.
Required:
a. what is the net operating income earned by product m12Caccording to the company’s accounting system? Show work
b. what would be the effect on the company’s overall netoperating income of dropping product M12C? Should the product bedropped? Show work

Explanation / Answer

A. Operating Income earned by product m12c                                 Schmader Corporation                                 Income statement Sales                                        550,000 -Variableexpenses                   242,000 ContributionMargin                  308,000 -Fixed mfg.costs     215,000 Fixed admin costs  132,000       347,000 OperatingLoss                          (39,000) B. Effect on the operating income / (loss) by dropping the productM12C There won't be any revenue or variable expenses. Fixed Mfg. costs (215,000-137,000)          78,000 Fixed S&Admin ( 132,000 -79,000)            53,000 Net loss afterdiscontinuing                       (131,000) Since the above fixed costs occur even the production stops theloss is widened. So, the management should find ways to reduce thecosts and increase the sales, but should not drop theproduction.

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