Question

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $247,000 of the fixed manufacturing expenses and $208,000 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:

Answer 1

($140,000)

Step-by-step explanation:

The computation of financial advantage (disadvantage) for the company is shown below:-

If product LO7E is discontinued then $247,000 and $208,000 would contribute to savings and loss of contribution equals $595,000 ($990,000-$ 395,000)

Financial advantage/Disadvantage = Fixed manufacturing expenses + Fixed selling and administrative expenses - Contribution

= $247,000 + $208,000 - $595,000

= ($140,000)

Therefore for computing the financial advantage (disadvantage) for the company we simply applied the above formula.