---### Business Decision Analysis: Case Study**Scenario:**Patel Corporation is considering discontinuing one of its product lines. This product line generates a contribution margin of $330,000 per year. Fixed expenses allocated to the product line are $420,000 per year. It is estimated that $255,000 of these fixed expenses could be eliminated if the product line is discontinued. Based on this data, what is the financial advantage or disadvantage of discontinuing the product line?**Question:***What is the financial advantage or disadvantage of discontinuing the product line?***Multiple Choice Options:**- Financial disadvantage of $75,000 per year.- Financial advantage of $165,000 per year.- Financial advantage of $75,000 per year.---### Explanation:To determine the financial impact of discontinuing the product line, we need to compare the contribution margin lost and the fixed expenses saved:1. Contribution Margin: $330,000 per year (lost if discontinued)2. Fixed Expenses: $420,000 per year - Fixed Expenses Eliminated: $255,000 per yearIf the product line is discontinued:- Total Fixed Expenses saved: $255,000- Contribution Margin lost: $330,000- Net Financial Impact = Contribution Margin lost - Fixed Expenses saved = $330,000 - $255,000 = $75,000Since the net financial impact is a loss, discontinuing the product line results in a financial disadvantage of $75,000 per year.---This scenario serves as an excellent example for understanding the financial implications of business decisions related to product line discontinuation. It highlights the importance of analyzing both contribution margins and fixed expenses to make informed decisions.---

Decision regarding the discontinuance of a product-line or a segment is taken on the basis of how…

Patel Corporation is considering discontinuing one of its product lines. This product line generates a contribution margin of $330,000 per year. Fixed expenses allocated to the product line are $420,000 per year. It is estimated that $255,000 of these fixed expenses could be eliminated if the product line is discontinued. Based on this data, what is the financial advantage or disadvantage of discontinuing the product line? Multiple Choice Financial disadvantage of $75,000 per year. Financial advantage of $165,000 per year. Financial advantage of $75,000 per year.

Patel Corporation is considering discontinuing one of its product lines. This product line generates a contribution margin of $330,000 per year. Fixed expenses allocated to the product line are $420,000 per year. It is estimated that $255,000 of these fixed expenses could be eliminated if the product line is discontinued. Based on this data, what is the financial advantage or disadvantage of discontinuing the product line? Multiple Choice Financial disadvantage of $75,000 per year. Financial advantage of $165,000 per year. Financial advantage of $75,000 per year.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

Trebecker Construction plans to discontinue its roofing segment which last year generated a contribution margin of $65,000 and incurred $90,000 in fixed costs. If the segment is discontinued, half of the fixed costs will be avoided. What effect is expected to occur to the company’s overall profit? A decrease of $20,000 A decrease of $15,000 An increase of $15,000 An increase of $20,000 An increase of $30,000
Fido Company has three segments, one of which is unprofitable. The Duchess Doggy Biscuit segment had the following results last period: Sales $1,040,000 Variable expenses (640,000) Contribution margin 400,000 (540,000) Fixed expenses Net loss $(140,000) If the Duchess Doggy Biscuit segment is eliminated, 50% of the fixed expenses can also be eliminated, the other 50% will be reallocated. What will happen to company net income if this product line is eliminated? O Decrease by $400,000. ODecrease by $130,000. O Increase by $140,000. Increase by $270,000. 2-56 PM 11/10/2019 hp end dn 6d home ins prt sc delete 12 to
Ortega Interiors provides design services to residential and commercial clients. The residential services produce a contribution margin of P450,000 and have traceable fixed operating costs of P480,000. Management is studying whether to drop the residential operation. If closed, the fixed operating costs will fall by P370,000 and Ortega's net income will increase or (decrease) by? (PUT NEGATIVE SIGN IF DECREASE)
Your firm is contemplating the purchase of a new $1,200,000 computer- based order entry system. The system will be depreciated straight-line to zero over its 10 (ten-) year life. It will be worth $100,000 at the end of that time. You will save $400,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $120,000 (this is a 1 (one) time reduction). If the tax rate is 25 percent and discount rate is 10%, what is the NPV for this project?
Chocoholics Anonymous wants to modernize its production machinery. The company's sales are $9.22 million per year, and the choice of machine won't impact that amount. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis. Machine Amaretto costs $1,950,000 and will last for 5 years. Variable costs are 39 percent of sales, and fixed costs are $131,000 per year. Machine Baileys costs $4,610,000 and will last for 7 years. Variable costs for this machine are 31 percent of sales and fixed costs are $103,000 per year. Required: (a)If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine Amaretto? (Do not round your intermediate calculations.) HINT: In EAC problems you first need to find the NPV. Using this NPV you can then calculate the annuity (annual cost) that has the same present value/cost. The lecture videos include a detailed example of this calculation.…
Please show excel work
In 2019, Papa Company provided the following data: Sales price per unit P100; Variable cost per unit P60; Total fixed cost at P1,500,000. For 2020, Papa Company is planning to buy a machine that will reduce the production workers and cut the sales price of the product at the same time. The new machine will increase the fixed cost by P500,000 due to depreciation; variable cost per unit will decrease by 25% due to reduction of direct workers; and the sales price will be reduced by 10%. What is the break-even units in 2020? * 45,000 O 44,444 O 37.500 O 50,000
Your firm is contemplating the purchase of a new $575,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $59,000 at the end of that time. You will save $265,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $74,000 (this is a one-time reduction). If the tax rate is 21 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR %
A new electronic process monitor costs $7,000,000. This cost could be depreciated at 30% peryear (CCA Class 10). The monitor could be sold for $1,428,595 at the end of five years. The newmonitor would save the firm $2,400,000 before taxes in annual operating costs for the five years.There would be no impact on net working capital. The firm’s weighted average cost of capital is15% and the corporate tax rate is 40% What would be the NPV of purchasing this system?
Granfield company is considering eliminating its backpack division, which reported an operating loss for the recent year of $42700. The division sales for the year were $973300 and the variable costs were $482000. The fixed costs of the division were $534000. If the backpack division dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on granfield operating income for eliminating this business segment would be?
Your company has been doing well, reaching $1.02 million in earnings, and is considering launching a new product. Designing the new product has already cost $510,000. The company estimates that it will sell 773,000 units per year for $3.05 per unit and variable non-labor costs will be $1.09 per unit. Production will end after year 3. New equipment costing $1.01 million will be required. The equipment will be depreciated to zero using the 7-year MACRS schedule. You plan to sell the equipment for book value at the end of year 3. Your current level of working capital is $302,000. The new product will require the working capital to increase to a level of $387,000 immediately, then to $399,000 in year 1, in year 2 the level will be $341,000, and finally in year 3 the level will return to $302,000. Your tax rate is 21%. The discount rate for this project is 9.7%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year…
In 2019, Reyes Company provided the following data: Sales price per unit P100; Variable cost per unit P60; Total fixed cost at P1,500,000. For 2020, Papa Company is planning to buy a machine that will reduce the production workers and cut the sales price of the product at the same time. The new machine will increase the fixed cost by P500,000 due to depreciation; variable cost per unit will decrease by 25% due to reduction of direct workers; and the sales price will be reduced by 10%. What is the profit (before tax) if the company produces and sells 45,000 units in 2020? a.28,000 b.25,000 c.27,000 d.26,000 What is the break-even units in 2020? a.37.500 b.50,000 c.44,444 d.45,000 What is the profit if the company operates at 45,000-unit volume? a.P600,000 b.P300,000 c.P 45,000 d.None of the above