The Data Given Below Is Taken from the Budgeted Income

question 19

Essay

The data given below is taken from the budgeted income statement of the Arrow Corporation for 2013. It shows the projected net income or loss for each of the firm's three products. Management is concerned about the budgeted loss for Product C and wants to discontinue it. Prepare an analysis indicating the effects of discontinuing Product C. Based on the analysis, indicate the decision that should be made.
$\begin{array}{c}\begin{array}{lr}& \text { Product A }\\\text { Sales }&\underline{ \$ 35,000} \\\text { Cost of Goods Sold } & \\\text { Direct Materials } &\$5,000 \\\text { Direct Labor } & \$ 7,000 \\\text { Mfg. Overhead } & \underline{3,500} \\\text { Total } &\underline{ \$ 15,500 }\\\text { Gross Profit on Sales } & \$ 19,500 \\\text { Operating Expenses } & \underline{13,000} \\\text { Net Income or (Loss) } &\underline{ \$ 6,500}\end{array}\begin{array}{c}\text { Product B}\\ \underline{ \$ 90,000 }\\\\\$ 11,000 \\16,000\\ \underline{8,000}\\ \underline{\$ 35,000} \\ \$ 55,000 \\ \underline{24,000}\\ \underline{\$ 31,000} \end{array}\begin{array}{c}\text { Product C}\\ \underline{ \$ 20,000 }\\\\\$ 4,000 \\6,000\\ \underline{3,000}\\ \underline{\$ 13,000} \\ \$ 7,000 \\ \underline{10,000}\\ \underline{(\$ 3,000)} \end{array}\begin{array}{c}\text { Total}\\ \underline{ \$ 145,000 }\\\\\$ 20,000 \\29,000\\ \underline{14,500}\\ \underline{\$ 63,500} \\ \$ 81,500 \\ \underline{47,000}\\ \underline{(\$ 34,500)} \end{array}\end{array}$ Additional information:
(a.) Materials and labor are variable costs.
(b.) Total manufacturing overhead is applied at 50 percent of the direct labor costs.
(c.) Variable overhead is 10 percent of the direct labor costs.
(d.) Fixed overhead totals $11,600 a year.
(e.) Operating expenses include variable costs at 20 percent of sales dollars.
(f.) Fixed operating expenses total $18,000.
(g.) Fixed overhead costs and fixed operating expenses are expected to continue if Product C is eliminated.

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Definitions:

Valuing Business

The process of determining the economic value of a company using various methods, including financial analysis, market comparisons, and asset evaluation.

Business Valuation

The process of determining the economic value of a business or company, using various methodologies to assess its overall worth.

Balance Sheet Method

The balance sheet method is an accounting technique used to calculate the net worth of a company by summarizing its financial assets, liabilities, and equity at a specific point in time.

Asset Method

A valuation technique that determines a company's value based on the total net assets it possesses, often used in the context of mergers, acquisitions, and financial reporting.