The Clemson Company reported the following results last year for the manufacture
ID: 2386515 • Letter: T
Question
The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam.Sales (6,500 Tams at $130 each)
$845,000
Variable cost of sales
390,000
Variable distribution costs
65,000
Fixed advertising expense
275,000
Salary of product line manager
25,000
Fixed manufacturing overhead
145,000
Net operating loss
$(55,000)
Clemson Company is trying to determine whether 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 isn't 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 manufacture and sale of Tams will have no effect on the sale of other product lines. If the company discontinues the Tam product line, the change in annual operating income (or loss) should be a
A. $65,000 decrease.
B. $55,000 decrease.
C. $90,000 decrease.
D. $70,000 increase.
***Please SHOW HOW to get this!
Explanation / Answer
If Tam were dropped, there would be no sales and there would be no costs associated with it except for the $145,000 of fixed manufacturing overhead. Since the net operating loss was $55,000, the $145,000 would increase that loss by $90,000. So the answer is C.