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A net loss of $60,000 was reported for Buzz Lightyear if the Asteroid Manufacturing Company for the past year
A net loss of $60,000 was reported for Buzz Lightyear if the Asteroid Manufacturing Company for the past year. This loss was computed as follows:
| Sales | $300,000 |
|---|---|
| Variable costs | (120,000) |
| Fxed costs | (240,000) |
| Net Loss | (60,000) |
Because of the loss, Asteroid is considering discounting Buzz Lightyear. The managerial accountant estimates that 60% of Buzz Lightyear's fixed costs are avoidable and 40% are unavoidable. Should Asteroid discontinue the Buzz Lightyear line? Why or why not?
Expert Solution
To decide whether Asteroid should discontinue the Buzz Lightyear line, the unavoidable fixed costs should be less than the current net loss reported.
| Fixed costs | $240,000 |
| Percentage unavoidable | 40% |
| Unavoidable fixed costs | $96,000 |
| Net loss | $60,000 |
| Difference | $36,000 |
|---|
The Buzz Lightyear line should not be discontinued because if they discontinue the line, it will incur them an additional loss of $36,000 as compared to continuing the line.
If the line is discontinued, the unavoidable fixed costs will be the only cost remaining, thus would be their net loss because they will not incur sales and variable costs.
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