Reference no: EM132617503
Lou Yi Company manufactures and sells Product K. Results for last year are as follows:
Sales (10,000 units at P150 each) .............. P1,500,000
Less expenses:
Variable production costs....................... P900,000
Sales commissions (15% of sales)........... 225,000
Salary of product line manager............... 190,000
Traceable fixed advertising expense....... 175,000
Fixed manufacturing overhead............... 160,000
Total expenses ........................................... 1,650,000
Net operating loss...................................... P (150,000)
Lou Yi is reexamining all of its product lines and is trying to decide whether to discontinue Product K. Dropping the product would have no effect on the total fixed manufacturing overhead incurred by the company.
Problem 1: Assume that dropping Product K will have no effect on the sale of other product lines. If the company drops Product K, the change in annual net operating income due to this decision will be?
Problem 2: Assume that dropping Product K would result in a P15,000 increase in the contribution margin of other product lines. If Bayshore chooses to drop Product K, then the change in net operating income next year due to this action will be?
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