Assume that a company manufactures and sells a variety of products, one of which it refers to as Product A. The company is considering dropping Product A because the income statement for this product is reporting a net operating loss as shown below:

Sales				$	500,000
Variable expenses:
Variable manufacturing expenses	$	240,000
Sales commissions		75,000
Shipping		25,000
Total variable expenses					340,000
Contribution margin					160,000
Fixed expenses:
Salary of product-line manager	$	65,000
Advertising for this product		35,000
General factory overhead		25,000
Depreciation on equipment		20,000
Insurance on this product’s inventories		8,000
Purchasing department		15,000
Total fixed expenses					168,000
Net operating loss				$	(8,000	)

If Product A is dropped, the company would transfer its product-line manager to another department and discontinue a search for a new manager that the company anticipated paying a salary of $46,000. The general factory overhead and purchasing department expenses are common costs that the company allocates to all of its products using total sales dollars as the allocation base. The equipment used to manufacture Product A does not wear out through use and it has no resale value. What is the financial advantage (disadvantage) of dropping Product A?

Multiple Choice

• $(31,000)

• $(71,000)

• $8,000

• $(51,000)

Answer rating: 100% (QA)

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