Balser Corporation manufactures and sells a number of products, including a product called JYMP. Results for last year for the manufacture and sale of JYMPs are as follows: Balser is trying to decide whether to discontinue the manufacture and sale of JYMPs. 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 JYMP will have no effect on other products. The annual financial advantage (disadvantage) for the company of eliminating this product should be:
A) $40,000
B) ($132,000)
C) ($92,000)
D) ($172,000)

Question

Balser Corporation manufactures and sells a number of products, including a product called JYMP. Results for last year for the manufacture and sale of JYMPs are as follows:  Balser is trying to decide whether to discontinue the manufacture and sale of JYMPs. 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 JYMP will have no effect on other products. The annual financial advantage (disadvantage) for the company of eliminating this product should be:
A) $40,000 
B) ($132,000) 
C) ($92,000) 
D) ($172,000)

Quizplus · Accepted Answer

To calculate the financial advantage or disadvantage of dropping Product JYMP, we need to calculate the contribution margin of the product, which is the revenue generated by the product less variable costs.

Contribution margin = Sales - Variable costs 
= $700,000 - ($400,000 + $300,000) 
= $700,000 - $700,000 
= $0

This means that the product is not generating any profit and is only covering its variable costs.

Now, to calculate the financial advantage or disadvantage of dropping Product JYMP, we need to calculate the total fixed costs associated with the product.

Total fixed costs = Fixed manufacturing overhead + Other fixed costs 
= $240,000 + $132,000 
= $372,000

If the product is dropped, the company will save all the variable costs associated with the product ($400,000 + $300,000 = $700,000) and will no longer generate any revenue from the product ($700,000).

Therefore, the annual financial advantage (disadvantage) of dropping Product JYMP can be calculated as follows:

Advantage (disadvantage) = Savings - Loss of contribution margin 
= ($700,000) - ($372,000) 
= ($92,000)

This means that dropping Product JYMP will result in a financial disadvantage of $92,000 for the company. Therefore, the best choice is C.

Balser Corporation Manufactures and Sells a Number of Products, Including