A manufacturing company is considering whether to drop or keep the product X because it realized net operating losses of 50,000 SR. The income statement for the product as follows:

• Net sales 200,000
• Variable costs 125,000
• Contribution margin 75,000
• Allocated fixed costs 75,000
• Traced and avoidable fixed costs 50,000
• Net operating loss 50,000

What is the right decision?

a. Keep because the contribution margin is less than relevant fixed costs.

b. Keep because the contribution margin is greater than relevant fixed costs.

c. Drop because the contribution margin is greater than relevant fixed costs.

d. Drop to avoid net operating loss of 50,000

Answer rating: 100% (QA)

The key factor in deciding whether to drop a product is whether the contribution margin covers all r... View the full answer