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Company GHI is a manufacturing company with a product line that has been sustaining quarterly losses for the last two years. As a result, management
Company GHI is a manufacturing company with a product line that has been sustaining quarterly losses for the last two years. As a result, management is considering dropping this product line. Data on the most recent quarterly results for this product line is as follows: Product Line X Sales $250,000 Direct materials $60,000 Direct labor $73,000 Manufacturing overhead $139,000 Selling and administrative expenses $75,000 Net operating income/loss) ($97,000) Manufacturing overhead is a mixed cost, with 40% of it as variable costs and the remainder of it as fixed costs. Selling and administrative expenses are also mixed costs, with 50% of it as variable costs and the remainder of it as fixed costs. If Company GHI drops this product line, they can save 30% of the fixed costs. Required (show all work): (a) Provide an analysis that clearly shows what will happen to Company GHI's quarterly net operating income if it drops Product Line X. (b) Should Company GHI keep or drop Product Line X? Why
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