Question

Question 3 Bubbles Corporation manufactures and sells a number of products, including a product called JMS7. Results for last year for the manufacture and sale of JMS7s are as follows: $ 960,000 Sales Less expenses: Variable production costs Sales commissions Salary of product manager Fixed product advertising Fixed manufacturing overhead Net operating loss $464,000 144,000 100,000 160,000 132,000 1,000,000 $ (40,000) Bubbles is trying to decide whether to discontinue the manufacture and sale of JMS7s. All expenses other than fixed manufacturing overhead are avoidable if the product is dropped. None of the fixed manufacturing overhead is avoidable. Assume that dropping Product JMS7 will have no effect on other products. What is the annual financial advantage (disadvantage) for the company of eliminating this product? b. Return to the original information. Now instead, assume that dropping Product JMS7 would result in a $90,000 increase in the contribution margin of other products. What is the annual financial advantage (disadvantage) for the company of eliminating this product under this scenario?

Answer 1

a.

		Effect on Net income
Sales	$960,000	$(960,000)
Variable Expenses:
Variable production costs	464,000	464,000
Sales commissions	144,000	144,000
Total variable expenses
Contribution margin	352,000	(352,000)
Fixed Expenses:
Salary of product manager	100,000	100,000
Fixed product advertising	160,000	160,000
Total avoidable fixed expenses	260,000	260,000
Net income	$92,000	$(92,000)

Annual financial disadvantage of dropping product JMS7 is $92,000

b.

Annual financial disadvantage of dropping product JMS7 is $2,000 (90,000-92,000)