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Decision to discontinue a product On the basis of the following data, the general manager of Featherweight Shoes Inc. decided to discontinue Children's Shoes because it reduced income from operations by $17,000. What is the flaw in this decision, if it is assumed fixed costs would not be materially affected by the discontinuance?

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285743615

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Section
BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285743615
Chapter 25, Problem 25.6EX
Textbook Problem
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Decision to discontinue a product

On the basis of the following data, the general manager of Featherweight Shoes Inc. decided to discontinue Children's Shoes because it reduced income from operations by $17,000. What is the flaw in this decision, if it is assumed fixed costs would not be materially affected by the discontinuance?

Chapter 25, Problem 25.6EX, Decision to discontinue a product On the basis of the following data, the general manager of

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Identify: The flaw in the decision of assuming that fixed costs would not be materially affected by discontinuation of the Children’s shoes.

Explanation of Solution

The differential analysis of Company FF shows that the fixed costs are constant immaterial of what is being produced or not by the company. Production of more goods reduces the fixed cost per unit and less goods increases the fixed cost per unit.

Fixed costs are the costs incurred by the company to support the running of the organization like rent, and salaries. They need to be made repeatedly to make sure the business keeps going. If the management decides to discontinue a product, it also needs to decide for an alternate source to generate the income to meet the fixed costs.

The management of Company FF, needs to consider fixed costs before deciding to discontinue Children’s shoes, as Children’s  shoes generates an operating loss of $17,000, but discontinuing the Children’s shoes would result in loss of $76,000. Thus, an excessive loss of $59,000 would be made if the Children’s shoes are discontinued...

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Chapter 25 Solutions

Accounting (Text Only)
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