Top Managers of Advanced Data Manufacturing Are Alarmed by Their

question 132

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 Manufacturing
Income Statement
For the Year Ended December 31, 20XX

$\begin{array}{lccc}&\text { Total}&\text { Laptop}&\text { Desktop }\\\text { Sales Revenue } & \$ 930,000 & \$ 575,000 & \$ 355,000 \\\text { Variable Costs } & \underline{507,000} & \underline{267,000} & \underline{240,000} \\\text { Contribution Margin } & 423,000 & 308,000 & 115,000\end{array}$
Fixed Costs:
$\begin{array}{lrrr}\text { Manufacturing } & 375,000 & 225,000 & 150,000 \\\text { Selling and Administrative } & \underline{62,000} & \underline{45,000} & \underline{17,000} \\\text { Total Fixed Costs } & \underline{437,000} & \underline{270,000} & \underline{167,000} \\\text { Operating Income (Loss) } & \underline{\underline{\$(14,000)}} & \underline{\underline{\$ 38,000}} & \underline{\underline{\$(52,000)}}\end{array}$
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:

Direct Labor-hour

A measure of the amount of time spent by workers directly involved in the production process to manufacture a product.

High-low Method

An approach in cost accounting to determine variable and fixed charges, based on analyzing the activity's minimum and maximum levels.

Job-Order Costing

A costing system used in situations where many different products, jobs, or services are produced each period.

Process Costing

A costing method used when essentially homogeneous products are produced on a continuous basis.