Question

ator Corporation manufactures several types of accessories. For the year, the gloves and mittens line had sales of $494,000, variable expenses of $361,000, and fixed expenses of $150,000. Therefore, the gloves and mittens line had a net loss of $17,000. If Gator eliminates the line, $37,000 of fixed costs will remain. Prepare an analysis showing whether the company should eliminate the gloves and mittens line. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

Answer:

Incremental costs and revenues determination :

Sales                                                           ($494,000)

Variable Expense                                        $361,000

Fixed Expenses ( $150,000 - $37,000)      $113,000

Incremental Income/ (loss)                          ($20,000)  

Conclusion

the company should not eliminate the gloves and mittens line.

Explanation:

To determine whether the company should eliminate the gloves and mittens line, we have to look into the incremental costs and revenues that come with this action.

Incremental costs and revenues determination :

Sales                                                           ($494,000)

Variable Expense                                        $361,000

Fixed Expenses ( $150,000 - $37,000)      $113,000

Incremental Income/ (loss)                          ($20,000)        

Before the gloves and mittens line was eliminated, they contributed a net loss of   $17,000 to overall Company Manufacturing Activities. the elimination  of   gloves and mittens line has a financial disadvantage of $20,000 - the amount which is greater than the existing net loss.

Eliminating the  gloves and mittens line leaves the Company at a worse off position of $20,000. Thus the company should not eliminate the gloves and mittens line.

Answer 2

Answer:

The company should not eliminate the gloves and mittens line.

Explanation:

The decision to discontinue operations of any product-line must be based on relevant information. Relevant information can be relevant benefit or cost and it is that information which differs between alternatives. In the process of identifying relevant costs, you must differentiate between avoidable and unavoidable costs. An avoidable cost can be eliminated by choosing alternatives and it is known as the relevant cost/information. On the other hand, unavoidable cost will continue to incur even if you discontinue your operations. In the case given, the fixed cost of $37,000 is an unavoidable cost because it will remain even if the product line is dropped.

Analysis

                                 Continue               Eliminate                 Net

Sales                         $494,000                   -                 ($494,000)

Variable expense     (361,000)                    -                    361,000

Fixed expenses        (150,000)             ($37,000)            113,000

Net Loss                     (17,000)                (37,000)            (20,000)

The analysis indicates that Ator corporation should not eliminate the gloves and mittens line because the net income will further decrease by $20,000. Currently, they are making a loss of $17,000, if they decided to discontinue their operations, the loss will further go up to $37,000.