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the management of kaladonia industries is considering dropping product x-198. data from the company's accounting system for this product for last year appear below: sales $ 918,000 variable expenses $ 403,000 fixed manufacturing expenses $ 332,000 fixed selling and administrative expenses $ 239,000 all fixed expenses of the company are fully allocated to products in the company's accounting system. further investigation has revealed that $205,000 of the fixed manufacturing expenses and $116,000 of the fixed selling and administrative expenses are avoidable if product x-198 is discontinued. what would be the financial advantage (disadvantage) from dropping product x-198?

Respuesta :

According to the company's accounting system, The financial advantage (disadvantage) from dropping product x-198 is -$ 26,000

Sales                                                                   = $ 918,000

Variable Expenses                                             = $ 403,000

Contribution margin = Sales - Variable Expenses

                                  = $ 918,000 - $ 403,000

∴ Contribution margin = $ 515,000

Fixed Expenses:

Fixed manufacturing expenses                         = $ 332,000

Fixed selling and admin Expenses                    = $ 239,000

Total Fixed expenses = Fixed manufacturing expenses + Fixed selling

                                       and admin Expenses

                                    = $ 332,000 + $ 239,000

∴ Total Fixed expenses = $ 571,000

⇒ Financial advantage (disadvantage) = Contribution margin - Total Fixed

                                                                   expenses

                                                               = $ 515,000 - $ 571,000

⇒ Financial advantage (disadvantage) = -$ 26,000

  • The incremental profit or loss that a corporation will realize in circumstances like accepting a special order, discontinuing a business line, etc. is referred to as a financial advantage (disadvantage).
  • Only the necessary costs are taken into account while calculating it. The incremental costs and revenues are combined to determine whether there is a financial benefit or disadvantage. Financial advantage and financial disadvantage are expressed in terms of incremental net operating income and loss, respectively.

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