Jordan Corporation Is Considering Dropping Product W22t Data ✓ Solved

Jordan Corporation Is Considering Dropping Product W22t Data From

Jordan Corporation is considering dropping product W22T. Data from the company's accounting system appear below: Sales, variable expenses, fixed manufacturing expenses, and fixed selling and administrative expenses. All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that some fixed expenses are avoidable if product W22T is discontinued.

What would be the effect on the company's overall net operating income of dropping product W22T?

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Analyzing the decision to discontinue a product involves understanding how this action will influence the company’s overall profitability. In the case of Jordan Corporation, which is considering dropping product W22T, a detailed evaluation of revenues, costs, and the avoidability of expenses is essential. This essay examines the financial implications of eliminating product W22T, including the impact on net operating income, based on the provided data and relevant managerial accounting principles.

Initially, the data from the company's accounting system indicates that product W22T currently generates sales totaling a certain amount, with associated variable expenses and allocations of fixed expenses. While the exact sales figure is not explicitly mentioned, the data emphasizes the variable expenses amount of $234,000 for product W22T. Variable expenses are directly tied to product sales and are avoidable if the product is discontinued, which is a critical consideration in decision-making.

Fixed expenses, on the other hand, are fully allocated across all products, and the provided data states that total fixed manufacturing expenses amount to $170,000, with fixed selling and administrative expenses totaling $206,000. However, further investigation reveals that not all fixed expenses are unavoidable. Specifically, $125,000 of fixed manufacturing expenses and $114,000 of fixed selling and administrative expenses are avoidable if product W22T is discontinued. This insight significantly influences the decision because it alters the overall fixed cost structure related to the product.

To determine the net effect on operating income, the relevant costs need to be identified. These are primarily the avoidable costs — the variable expenses associated with the product and the avoidable fixed expenses. The calculation involves subtracting these avoidable expenses from the sales revenue of product W22T.

Assuming the sales revenue for W22T is provided or can be inferred from context, the impact on net operating income can be computed as follows: Discontinue W22T, subtracting the avoidable expenses from its revenue. If the contribution margin (sales minus variable expenses) of W22T is positive even after considering the avoidable fixed costs, discontinuing the product would reduce overall profitability. Conversely, if the contribution margin is negative, dropping the product might improve net operating income.

In this specific case, the approximate calculation would involve summing the avoidable fixed expenses ($125,000 + $114,000 = $239,000) and variable expenses ($234,000), then comparing this total to the sales revenue generated by W22T. The decision hinges on whether the product's contribution margin surpasses these avoidable expenses. If the contribution margin is less than these costs, discontinuing the product would lead to an increase in net operating income. If it exceeds these expenses, it would decrease overall profitability.

Considering managerial accounting principles, the pertinent measure here is the avoidable costs. Fixed costs allocated to W22T that are avoidable are relevant to the decision, while unavoidable fixed costs should not influence the decision since they will incur regardless of the product line’s continuation or discontinuation. Therefore, the focus is on the contribution margin: sales minus variable expenses and avoidable fixed expenses.

Applying this approach, if calculations indicate that the contribution margin of W22T is less than its avoidable expenses, discontinuing W22T would be beneficial. Conversely, if it is greater, the company might be better served maintaining the product. This decision-making process exemplifies activity-based costing and incremental analysis, key tools for managerial decision-making.

In conclusion, the effect of dropping product W22T on Jordan Corporation’s net operating income depends on the product’s contribution margin after accounting for avoidable fixed expenses. Accurate identification of sales revenue and the related costs allows management to make an informed decision that maximizes profitability. This analysis underscores the importance of distinguishing between fixed costs that are avoidable and those that are sunk, highlighting the relevance of relevant costs in managerial decision-making.

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