The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system for this product for last year appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.What would be the financial advantage (disadvantage) from dropping product D74F?
A) $226,000
B) $58,000
C) ($226,000)
D) ($58,000)

Question

The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system for this product for last year appear below:  All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.What would be the financial advantage (disadvantage) from dropping product D74F?
A) $226,000 
B) $58,000 
C) ($226,000) 
D) ($58,000)

Quizplus · Accepted Answer

The relevant costs to consider for dropping product D74F are the avoidable fixed costs, which are $111,000 (fixed manufacturing expenses) + $103,000 (fixed selling and administrative expenses) = $214,000. 
The total contribution margin from product D74F is $520,000 - $365,000 = $155,000. 
Therefore, dropping product D74F would result in a net loss of ($59,000) = ($155,000 - $214,000).

The Management of Bonga Corporation Is Considering Dropping Product D74F