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Home / Questions / EXERCISE 12 10 Dropping or Retaining a Segment LO2 Dexter Products Inc manufactures and se...

EXERCISE 12 10 Dropping or Retaining a Segment LO2 Dexter Products Inc manufactures and sells a number of items including an overnight case The company has been experiencing losses on the over

EXERCISE 12–10 Dropping or Retaining a Segment [LO2]

Dexter Products, Inc., manufactures and sells a number of items, including an overnight case. The company has been experiencing losses on the overnight case for some time, as shown on the fol- lowing contribution format income statement:

 

 

 

 

 

 

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Variable expenses:

Variable manufacturing expenses . . . . . . . . . . . . . . .

 

 

 

$130,000

$450,000

Sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . .

48,000

 

Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,000

 

Total variable expenses . . . . . . . . . . . . . . . . . . . . . . . .

 

190,000

Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . .

 

260,000

Fixed expenses:

 

 

Salary of product-line manager . . . . . . . . . . . . . . . . .

21,000

 

General factory overhead . . . . . . . . . . . . . . . . . . .  .

104,000*

 

Depreciation of equipment (no resale value) . . . . . . .

36,000

 

Advertising—traceable . . . . . . . . . . . . . . . . . . . . . . .

110,000

 

Insurance on inventories . . . . . . . . . . . . . . . . . . . . . .

9,000

 

Purchasing department . . . . . . . . . . . . . . . . . . . . . . .

50,000†

 

Total fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .

 

330,000

Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

 

$ (70,000)

*Allocated on the basis of machine-hours.

†Allocated on the basis of sales dollars.

 

 

 

 

 

 

 

Discontinuing the overnight cases would not affect the company’s sales of its other product lines, its total general factory overhead, or its total purchasing department expenses.

Required:

Would you recommend that the company discontinue the manufacture and sale of overnight cases? Support your answer with appropriate computations.

Jun 27 2020 View more View Less

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