One of ABC product line has been unprofitable for the past 18 months. The latest monthly income statement for the product line is as follows: Sales revenue 19,000 Less: Cost of sales 8,500 Gross profit 10,500 Operating expenses Depreciation 2,750 Insurance 1,400 Manager salary 1,100 Supplies 1,750 Utilities 1,100 Wages 5,000 Total operating expenses 13,100 Profit or loss (2,600) In relation to the operating expenses, utilities, manager salary and $2,000 of the depreciation expense are allocated to this product line. Required: Assume that the sales of other product lines will not be affected by the decision, evaluate whether the unprofitable product line should be disestablished from a financial standpoint
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
One of ABC product line has been unprofitable for the past 18 months. The latest monthly income statement for the product line is as follows:
|
Sales revenue |
19,000 |
|
|
Less: Cost of sales |
8,500 |
|
|
Gross profit |
10,500 |
|
|
Operating expenses |
||
|
|
2,750 |
|
|
Insurance |
1,400 |
|
|
Manager salary |
1,100 |
|
|
Supplies |
1,750 |
|
|
Utilities |
1,100 |
|
|
Wages |
5,000 |
|
|
Total operating expenses |
13,100 |
|
|
Profit or loss |
(2,600) |
In relation to the operating expenses, utilities, manager salary and $2,000 of the depreciation expense are allocated to this product line.
Required:
Assume that the sales of other product lines will not be affected by the decision, evaluate whether the unprofitable product line should be disestablished from a financial standpoint.
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