Discontinuing a product line Suppose Post Cereals is considering discontinuing its maple cereal product line. Assume that during the past year, the maple cereal product line income statement showed the following: Sales $5,200,000 Cost of Goods Sold 6,350,000 Gross Profit (1,150,000) Operating Expenses 1,500,000 Operating Loss $(2,650,000) Fixed manufacturing overhead costs account for 40% of the costs of goods, while only 30% of the operating expenses are fixed. Since the maple cereal line is only one of Post Cereals' breakfast cereals, only $755,000 of direct fixed costs (the majority of which is advertising) will be eliminated if the product line is discontinued. The remainder of the fixed costs will still be incurred by Post Cereals. If the company decides to discontinue the product line, what will happen to the company's operating income? Should Post Cereals discontinue the maple cereal product line? Expected decrease in revenues Expected decrease in expenses Variable manufacturing expenses Direct fixed expenses Expected increase/(decrease) in operating income Explanation: E8-39B Make-or-buy product component (Learning Objective 6) World Systems manufactures an optical switch that it uses in its final product. World Systems incurred the following manufacturing costs when it produced 66,000 units last year: Direct materials $726,000 Direct labor 99,000 Variable overhead 132,000 Fixed overhead 363,000 Total manufacturing cost for 66,000 units $1,320,000 World Systems does not yet know how many switches it will need this year; however, another company has offered to sell World Systems the switch for $12.50 per unit. If World Systems buys the switch from the outside supplier, the manufacturing facilities that will be idle cannot be used for any other purpose, yet non of the fixed costs are avoidable. Requirements (1) Given the same cost structure, should World Systems make or buy the switch? Show your analysis. Switch costs (unit costs) Make Switches Buy Switches Difference Variable costs: Direct Materials Direct Labor Variable Overhead Purchase cost from new supplier Total cost of switches $- $- $- Explanation: (2) Now assume that World Systems can avoid $99,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, World Systems needs 71,000 switches a year rather than 66,000. What should World Systems do now? Make Switches Buy Switches Variable cost per unit $- $- Number of units to produce Total variable costs $- $- Fixed overhead Total cost of switches $- $- Explanation: Discontinuing a product line Suppose Post Cereals is considering discontinuing its maple cereal product line. Assume that during the past year, the maple cereal product line income statement showed the following: Sales $5,200,000 Cost of Goods Sold 6,350,000 Gross Profit (1,150,000) Operating Expenses 1,500,000 Operating Loss $(2,650,000) Fixed manufacturing overhead costs account for 40% of the costs of goods, while only 30% of the operating expenses are fixed. Since the maple cereal line is only one of Post Cereals' breakfast cereals, only $755,000 of direct fixed costs (the majority of which is advertising) will be eliminated if the product line is discontinued. The remainder of the fixed costs will still be incurred by Post Cereals. If the company decides to discontinue the product line, what will happen to the company's operating income? Should Post Cereals discontinue the maple cereal product line? Expected decrease in revenues Expected decrease in expenses Variable manufacturing expenses Direct fixed expenses Expected increase/(decrease) in operating income Explanation: E8-39B Make-or-buy product component (Learning Objective 6) World Systems manufactures an optical switch that it uses in its final product. World Systems incurred the following manufacturing costs when it produced 66,000 units last year: Direct materials $726,000 Direct labor 99,000 Variable overhead 132,000 Fixed overhead 363,000 Total manufacturing cost for 66,000 units $1,320,000 World Systems does not yet know how many switches it will need this year; however, another company has offered to sell World Systems the switch for $12.50 per unit. If World Systems buys the switch from the outside supplier, the manufacturing facilities that will be idle cannot be used for any other purpose, yet non of the fixed costs are avoidable. Requirements (1) Given the same cost structure, should World Systems make or buy the switch? Show your analysis. Switch costs (unit costs) Make Switches Buy Switches Difference Variable costs: Direct Materials Direct Labor Variable Overhead Purchase cost from new supplier Total cost of switches $- $- $- Explanation: (2) Now assume that World Systems can avoid $99,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, World Systems needs 71,000 switches a year rather than 66,000. What should World Systems do now? Make Switches Buy Switches Variable cost per unit $- $- Number of units to produce Total variable costs $- $- Fixed overhead Total cost of switches $- $- Explanation: Discontinuing a product line Suppose Post Cereals is considering discontinuing its maple cereal product line. Assume that during the past year, the maple cereal product line income statement showed the following: Sales $5,200,000 Cost of Goods Sold 6,350,000 Gross Profit (1,150,000) Operating Expenses 1,500,000 Operating Loss $(2,650,000) Fixed manufacturing overhead costs account for 40% of the costs of goods, while only 30% of the operating expenses are fixed. Since the maple cereal line is only one of Post Cereals' breakfast cereals, only $755,000 of direct fixed costs (the majority of which is advertising) will be eliminated if the product line is discontinued. The remainder of the fixed costs will still be incurred by Post Cereals. If the company decides to discontinue the product line, what will happen to the company's operating income? Should Post Cereals discontinue the maple cereal product line? Expected decrease in revenues Expected decrease in expenses Variable manufacturing expenses Direct fixed expenses Expected increase/(decrease) in operating income Explanation: E8-39B Make-or-buy product component (Learning Objective 6) World Systems manufactures an optical switch that it uses in its final product. World Systems incurred the following manufacturing costs when it produced 66,000 units last year: Direct materials $726,000 Direct labor 99,000 Variable overhead 132,000 Fixed overhead 363,000 Total manufacturing cost for 66,000 units $1,320,000 World Systems does not yet know how many switches it will need this year; however, another company has offered to sell World Systems the switch for $12.50 per unit. If World Systems buys the switch from the outside supplier, the manufacturing facilities that will be idle cannot be used for any other purpose, yet non of the fixed costs are avoidable. Requirements (1) Given the same cost structure, should World Systems make or buy the switch? Show your analysis. Switch costs (unit costs) Make Switches Buy Switches Difference Variable costs: Direct Materials Direct Labor Variable Overhead Purchase cost from new supplier Total cost of switches $- $- $- Explanation: (2) Now assume that World Systems can avoid $99,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, World Systems needs 71,000 switches a year rather than 66,000. What should World Systems do now? Make Switches Buy Switches Variable cost per unit $- $- Number of units to produce Total variable costs $- $- Fixed overhead Total cost of switches $- $- Explanation: