
The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system for this product for last year appear below:

Sales

$ 830,000

Variable expenses

$ 390,000

Fixed manufacturing expenses

$ 266,000

Fixed selling and administrative expenses

$ 232,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.

What would be the financial advantage (disadvantage) from dropping product D74F?

Multiple Choice

$226,000Incorrect

$58,000

($226,000)

($58,000)

To determine the financial advantage or disadvantage of discontinuing product D74F, we need to compare the costs that will be saved (avoidable costs) with the contribution margin that will be lost if the product is discontinued.

### Step 1: Calculate the Contribution Margin
Contribution margin = Sales - Variable expenses

\[
\text{Contribution margin} = 830,000 - 390,000 = 440,000
\]

### Step 2: Identify Avoidable Fixed Costs
The avoidable fixed costs are the costs that would no longer be incurred if the product is dropped. These are:
- Avoidable fixed manufacturing expenses = $111,000
- Avoidable fixed selling and administrative expenses = $103,000

Total avoidable fixed costs:
\[
111,000 + 103,000 = 214,000
\]

### Step 3: Calculate Net Financial Impact
If the product is discontinued, the company will lose the contribution margin ($440,000), but it will save the avoidable fixed costs ($214,000).

Net financial impact = Contribution margin - Avoidable fixed costs

\[
\text{Net financial impact} = 440,000 - 214,000 = 226,000
\]

Since the contribution margin is greater than the avoidable fixed costs, discontinuing the product will result in a **disadvantage**.

Thus, the financial disadvantage from dropping product D74F is:
\[
(\$226,000)
\]

### Correct Answer: **($226,000)**

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Would you like more details or have any questions?

Here are some related questions:
1. What are contribution margins and how are they used in decision-making?
2. How do fixed and variable costs affect product discontinuation decisions?
3. What are avoidable and unavoidable fixed costs?
4. How would dropping the product impact overall profitability?
5. How can the allocation of fixed costs distort decision-making?

**Tip:** Always distinguish between avoidable and unavoidable costs when evaluating product discontinuation decisions.

The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system for this product for last year appear below: Sales: $830,000; Variable expenses: $390,000; Fixed manufacturing expenses: $266,000; Fixed selling and administrative expenses: $232,000. All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued. What would be the financial advantage (disadvantage) from dropping product D74F? Options: $226,000, $58,000, ($226,000), ($58,000).

Analyze the financial impact of discontinuing product D74F at Bonga Corporation using contribution margin and avoidable cost analysis. Learn how to calculate contribution margins, identify avoidable fixed costs, and assess the net financial impact of discontinuation decisions. This example uses real company data, including sales of $830,000 and variable expenses of $390,000, and walks through step-by-step calculations.

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