Top Managers of Advanced Data Manufacturing Are Alarmed by Their $20 \times\times$

question 55

Essay

Top managers of Advanced Data Manufacturing are alarmed by their operating losses.They are considering dropping the desktop product line.The company accountants have prepared the following analysis to help make this decision.
Advanced Data Marufacturing
Income Staternent
For the Year Ended December 31, $20 \times\times$ $\begin{array}{|l|r|r|r|} \hline&{\text { Total }} &{\text { Laptop }} & \text { Desktop } \\\hline \text { Sales Revenue } & \$ 930,000 & \$ 575,000 & \$ 355,000 \\\hline \text { Variable Costs } & \underline{507,000} & \underline{267,000} & \underline{240,000} \\\hline \text { Contribution Margin } & 423,000 & 308,000 & 115,000 \\\hline \text { Fixed Costs: } & & & \\\hline \text { Manufacturing } & 375,000 & 225,000 & 150,000 \\\hline \text { Selling and Administrative } & \underline{62,000} & \underline{45,000} & \underline{17,000} \\\hline \text { Total Fixed Costs } & \underline{437,000} & \underline{270,000} & \underline{167,000} \\\hline \text { Operating Income (Loss) } & \underline{\$(14,000} & \underline{\$ 38,000} & \underline{\$(52,000)} \\\hline\\\hline\end{array}$ If the company stops selling the desktop product line,the company will be able to avoid 80% of the fixed manufacturing costs and 100% of the fixed selling and administrative costs.
Prepare a differential analysis to show whether Advanced Data Manufacturing should drop the desktop product line.Should the desktop product line be dropped? Explain your answer.

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Definitions:

Static Budget

A financial plan that does not change or adjust over the period, even when there are significant changes in the levels of activity.

Variable Costs

Expenses that change in proportion to the level of activity or production volume.

Static Budget

A budget that does not change or adapt over time, based on the assumption of a fixed level of activity.

Activity Index

The activity that causes changes in the behavior of costs.