Drop a division relevant cost

Needham Manufacturing produces three products. The following table summarizes operations for

the most recent year:

GT$45$ R$38$ Q$72$ Total

Sales $$2,654,000$ $$3,295,000$ $$4,576,000$ $$10,525,000$

Direct materials cost $1,350,0001,645,0002,378,0005,373,000$

Direct labor cost $935,0001,125,0002,035,0004,095,000$

Fixed manufacturing overhead $125,000167,000205,000497,000$

Product income $$244,000$ $$358,000$ $$-42,000$ $$560,000$

Unallocated corporate fixed costs $325,000$

Corporate income $$235,000$

This is the third year that a loss has been reported for product Q$72.$ Frank Needham, the owner and

manager of Needham Manufacturing, stated at the recent meeting of senior managers. $$It is time we

stopped producing Q$72.$ If we had not produced this product this past year, our income would be

$$42,000$ higher than what we achieved.$$

The company accountant has provided you with the following additional information: If product Q$72$

is eliminated, $40\%$ of the fixed manufacturing cost attributed to Q$72$ would be eliminated. Also, if

Q$72$ is eliminated, the sales of GT$45$ and R$38$ would each decline by $5\%$ because they are associated

products.

What will be the change in corporate income at Needham Manufacturing if Q$72$ is discontinued?

$Answer