Pirate Company\'s management is considering dropping its small television produc
ID: 2473859 • Letter: P
Question
Pirate Company's management is considering dropping its small television product line due to continued operating losses. Pirate has forecasted an operating loss of $25,000 for the upcoming year. Fixed expenses for the upcoming year are forecasted at $45,000, of which $30,000 is considered to be avoidable. Should Pirate Company drop the small television product line?
A. Yes, because the avoidable fixed costs exceed the contribution margin that would be lost
B. Yes, because of the forecasted operating loss of $25,000
C. No, because the unavoidable fixed xosts are less than the forecasted operating loss
D. No, because the contribution margin that would lost exceeds the $45,000 of fixed costs
Explanation / Answer
Answer to Question is Option A i.e Yes, Because the avoidable fixed cost exceed the contribution margin that would be loss
Forecasted Fixed Expenses = $ 45,000
Avoidable Fixed Expenses = $ 30,000 (i.e These expenses the company can avid if the it doesn't operate)
Forecasted operating loss = $ 25,000
So, better the company should discontinue the operation , as by discontinuing the company can avoid the fixed exoenses of $ 30,000 and will also not face the operating loss of $ 25,000
and the company will be bearing a cost of $ 15,000 as fixed cost which is unavoidable.