The management of a company is considering dropping a product line. Data from the company’s budget for the upcoming year for this product line appear below:
Sales Revenue: $950,000
Variable costs: $388,000
Fixed manufacturing costs: $370,000
Fixed selling and administrative costs: $250,000
Further investigation has revealed that $254,776 of the fixed manufacturing costs and $193,122 of the fixed selling and administrative expenses are avoidable if the product were discontinued. What is the total annual financial advantage (disadvantage) for the company from eliminating this product? (Round to the nearest dollar; use a positive number to indicate an advantage and a negative number to indicate a disadvantage.)
Answer:
Contribution margin = Sales - Variable expenses = $950,000 - $388,000 = $562,000
| Contribution margin lost | ($562,000) |
| Add: savings from avoidable fixed costs | |
| Fixed manufacturing expenses | $254,776 |
| Fixed selling and administrative expenses | $193,122 |
| Financial disadvantage from eliminating the product | ($114,102) |
The management of a company is considering dropping a product line. Data from the company’s budget...