DropCo. produces and sells several products, one of those product lines is the widget line. DropCo. has been losing money on this line for some
DropCo. produces and sells several products, one of those product lines is the widget line. DropCo. has been losing money on this line for some time, so they're consideing dropping this product line (ceasing production and sales activity). DropCo. typically produces and sells 10,000 widgets per year. The selling price is $100 per unit, and variable production costs are $65 per unit. Variable selling costs per unit are $15. Fixed manufacturing overhead costs amount to $200,000 per year, and annual Fixed selling costs amount to $150,000. If DropCo ceases production and sales of the widget line then they could save all selling costs and 60% of the Fixed manufacturing overhead costs. The other 40% of fixed manufacturing overhead costs are unavoidable. Using this given information about the widget line, answer the questions that follow: (a) Should DropCo. discontinue the widget product line? (b) How much is the impact to operating income (aka financial advantage or disadvantage) of dropping the product line? Make sure to show all your work to earn any credit.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started