Top managers of Computer Manufacturing are alarmed by their operating losses
They are considering dropping the desktop product line. The company accountants have prepared the following analysis to help make this decision.
Computer Manufacturing
Income Statement
For the Year Ended December 31, 20XX
Total Laptop Desktop
Sales Revenue $930,000 $575,000 $355,000
Variable Costs 507,000 267,000 240,000
Contribution Margin 423,000 308,000 115,000
Fixed Costs:
Manufacturing 375,000 225,000 150,000
Selling and Administrative 62,000 45,000 17,000
Total Fixed Costs 437,000 270,000 167,000
Operating Income (Loss) $(14,000 ) $38,000 $(52,000 )
Total fixed manufacturing costs will not change if the company stops selling the desktop product line. The fixed selling and administrative costs, however, will be avoided.
Prepare a differential analysis to show whether Computer Manufacturing should drop the desktop product line. Should the desktop product line be dropped? Explain your answer.
What will be an ideal response
Expected decrease in revenue $(355,000 )
Expected decrease in total variable costs $240,000
Expected decrease in fixed costs 17,000 257,000
Expected decrease in operating income $(98,000 )
The differential analysis shows that Computer Manufacturing should not drop the desktop product line. Dropping the desktop product line will decrease operating income by $ 98,000.
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