Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether. Data from the company's budget for the upcoming year appear below: 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 U23N 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)

Question

Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether. Data from the company's budget for the upcoming year appear below:  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 U23N 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)

Quizplus · Accepted Answer

By discontinuing product U23N, the company can avoid $144,000 of fixed manufacturing expenses and $93,000 of fixed selling and administrative expenses. Since all fixed expenses are fully allocated to products, this means that the total fixed cost of U23N is $237,000 ($144,000 + $93,000).

Looking at the budget, the contribution margin of U23N is only $94,000 ($745,000 - $651,000). This means that U23N is not even covering its variable and direct expenses, let alone its share of fixed expenses. Therefore, discontinuing U23N would result in a decrease in overall costs of $237,000, but also a decrease in revenue of $94,000.

The net financial advantage (disadvantage) of eliminating U23N would be:

Net advantage = (decrease in costs) + (decrease in revenue) = ($237,000) + ($94,000) = ($143,000)

Therefore, the best choice is C, which indicates a financial disadvantage of $143,000 for the company if U23N is discontinued.

Product U23N Has Been Considered a Drag on Profits at Jinkerson