ACCOUNTING FOR DECISION MAKING

Top managers of Advanced Data 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.

Advanced Data Manufacturing

Income Statement

For the Year Ended December 31, 2022

	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)

If the company stops selling the desktop product line, the company will be able to avoid 80% of the fixed manufacturing costs and 100% of the fixed selling and administrative costs.

Required

1. Put together a differential analysis to show whether Advanced Data Manufacturing should drop the desktop product line.
2. Should the desktop product line be dropped? Explain youranswer.

1. The management of Advanced Data Manufacturing isconsidering whether to drop a product line. So far, management has determined that the product has a negative contribution margin and that lost revenues are less than the total cost savings. In making the final decision, discuss five critical questions that the management of Advanced Data Manufacturingshould consider?