A study has been conducted to determine if Product A should be dropped. Sales of the product total $500,000; variable expenses total $340,000. Fixed expenses charged to the product total $210,000. The company estimates that $60,000 of these fixed expenses are not avoidable even if the product is dropped. If Product A is dropped, the annual financial advantage (disadvantage) for the company of eliminating this product should be:
A) ($10,000)
B) $10,000
C) ($50,000)
D) $50,000

Question

Quizplus · Accepted Answer

The financial advantage or disadvantage is calculated by considering the net profit or loss from the product and the avoidable fixed costs. Here, the net profit (or loss) from Product A is sales ($500,000) minus variable expenses ($340,000) and fixed expenses ($210,000), which equals ($50,000). Since $60,000 of the fixed expenses are unavoidable, only $150,000 of the fixed expenses would be saved if the product were dropped. Therefore, dropping the product would result in a financial disadvantage of ($10,000), as the loss from operations ($50,000) is partially offset by the elimination of avoidable fixed costs ($150,000), but not enough to overcome the total loss.

A Study Has Been Conducted to Determine If Product a Should