Reference: 09-06
Clemson Company Reported the Following Results Last Year

question 18

Multiple Choice

Reference: 09-06
Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. $$\begin{array} { | l | c | } \hline \text { Sales } ( 6,500 \text { Tams at } \$ 130 \text { each } ) & \$ 845,000 \\\hline \text { Variable cost of sales } & 390,000 \\\hline \text { Variable distribution costs } & 65,000 \\\hline \text { Fixed advertising expense } & 275,000 \\\hline \text { Salary of product line manager } & 25,000 \\\hline \text { Fixed manufacturing overhead } & 145,000 \\\hline \text { Net loss } & ( \$ 55,000 \\\hline\end{array}$$ Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturing costs of the company.
-Assume that discontinuing the Tam product would result in a $120,000 increase in the contribution margin of other product lines. How many Tams would have to be sold next year for the company to be as well off as if it just dropped the line and enjoyed the increase in contribution margin from other products?

• A)6,000 units.
• B)5,000 units.
• C)6,500 units.
• D)7,000 units.

---

Definitions:

Negative Income Tax

A fiscal mechanism where individuals earning below a certain threshold receive supplemental pay from the government instead of paying taxes.

Subsidy

A financial contribution provided by the government or another body to support an industry, business, or individual.

Earned Income Tax Credit

A refundable tax credit for low- to moderate-income working individuals and families, aimed at reducing poverty and encouraging work.

Working Poor

Individuals who are employed but still live below the poverty line due to low wages and inadequate employment benefits.