The Management of Schmader Corporation Is Considering Dropping Product M12C

question 414

Essay

The management of Schmader Corporation is considering dropping product M12C. Data from the company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $137,000 of the fixed manufacturing expenses and $79,000 of the fixed selling and administrative expenses are avoidable if product M12C is discontinued.Required:a. What is the net operating income earned by product M12C according to the company's accounting system?b. Determine the financial advantage (disadvantage) for the company of dropping product M12C. Should the product be dropped?

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Definitions:

Adjusted Cash Balance

The cash balance reported in the financial statements, adjusted for any outstanding checks and deposits in transit that have not yet been cleared or recorded by the bank.

Deposit In Transit

Refers to money that has been received and recorded by a business but has not yet been recorded by the bank.

Check Printing Charge

A fee charged by banks or financial institutions for printing and providing checks for an account holder's use.

Note Collected

A financial transaction where a receivable note is received or paid off, often reflecting incoming cash flow from a debtor.