The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below:
| Sales | $ | 830,000 |
| Variable expenses | $ | 365,000 |
| Fixed manufacturing expenses | $ | 291,000 |
| Fixed selling and administrative expenses | $ | 166,000 |
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:
Multiple Choice
Explanation
| Product L07E | ||||||
| Sales | $ | 830,000 | ||||
| Variable expenses | 365,000 | |||||
| Contribution margin | 465,000 | |||||
| Traceable fixed expenses: | ||||||
| Fixed manufacturing expenses | 186,000 | |||||
| Fixed selling and administrative expenses | 106,000 | 292,000 | ||||
| Segment margin | $ | 173,000 | ||||
The segment margin of $173,000 would be lost if product L07E were dropped.
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