The management of Furrow Corporation is considering dropping product L07E.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 $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued.The financial advantage (disadvantage)for the company of eliminating this product for the upcoming year would be:
A)$8,000
B)($173,000)
C)($8,000)
D)$173,000

Question

The management of Furrow Corporation is considering dropping product L07E.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 $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued.The financial advantage (disadvantage)for the company of eliminating this product for the upcoming year would be:
A)$8,000 
B)($173,000) 
C)($8,000) 
D)$173,000

Quizplus · Accepted Answer

The financial advantage (disadvantage) of eliminating product L07E can be calculated as follows:

Total avoidable fixed expenses = $186,000 + $106,000 = $292,000

If the product is dropped, the company will save $292,000 in fixed expenses. However, the company will lose the contribution margin that this product generates, which is $119,000.

Therefore, the net financial impact of dropping product L07E will be:

Net financial impact = Contribution margin - Avoidable fixed expenses
Net financial impact = $119,000 - $292,000
Net financial impact = ($173,000)

Since the net impact is negative, it means that dropping product L07E will result in a financial disadvantage for the company. Therefore, the best choice is to not drop product L07E. 11ea7998_5c58_45da_911b_af8e7041f179_TB2627_00_TB2627_00 The segment margin of $173,000 would be lost if product L07E were dropped.

The Management of Furrow Corporation Is Considering Dropping Product L07E