5. Product U has been considered a drag on profits at Junk Corporation for some
ID: 2586004 • Letter: 5
Question
5. Product U has been considered a drag on profits at Junk Corporation for some time and management is considering discontinuing the product altogether. Data from the company's budget for the upcoming year appear below Sales. Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses.$161,000 $730,000 $350,000 $234,000 In the company's accounting system all fixed expenses of the company are fully allocated to products Further investigation has revealed that $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling and administrative expenses are avoidable if product U is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be: A) $15,000 B) $143,000 C) ($143,000) D) ($15,000) 6. The Cook Corporation has two divisions-East and West. The divisions have the following revenues and expenses East West $500,000 $550,000 200,000 275,000 Sales.. Variable costs Traceable fixed costs Allocated common corporate cost. Net operating income (loss) 150,000 180,000 costs...135,000 170000 15,000 $(75.000) The management of Cook is considering the elimination of the West Division. If the West Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would result in an overall company net operating income (loss) of A) $15,000 B) $(155,000) C) $(75,000) D) $(60,000)Explanation / Answer
Answer 5 : (c) : $ (143,000)
Note: Reduction in revenue is more than saving in fixed cost. As such, there is negative savings.
Answer 6 : (b) $ (155,000)
Net operating income of East = $ 15,000
Allocated cost of West to be borne by East now = $ 170,000
Total operating loss = $ 15,000 - $ 170,000 = $ (155,000)
Note: Sales, Variable cost and traceable fixed cost for West would become Nil after discontinuation. However, allocated corporate cost would stil be there. That is, the total corporate cost of $ 135,000 + $ 170,000 would still exist and would be borne by East only in entirety.
Reduction in revenue (means cash outflow) =$ 730,000- $ 350,000 = $ 380,000 Savings in Expenses (means cash inflow) =$ 144,000+ $ 93,000 = $ 237,000 Net inflow =$ 237,000 - $ 380,000 = $ (143,000)Note: Reduction in revenue is more than saving in fixed cost. As such, there is negative savings.
Answer 6 : (b) $ (155,000)
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