The management of Kabanuck Corporation is considering dropping product V41B. Data from the company’s accounting system appear below: Sales $926,000 Variable expenses $407,000 Fixed manufacturing expenses $340,000 Fixed selling and administrative expenses $247,000 All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $209,000 of the fixed manufacturing expenses and $120,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued. What would be the effect on the company’s overall net operating income if product V41B were dropped?
Overall net operating income would increase by $68,000.
Overall net operating income would increase by $190,000.
Overall net operating income would decrease by $190,000.
Overall net operating income would decrease by $68,000.
Answer
Overall net operating income would decrease by $190,000. Net operating income would decline by $190,000 if Product J41B were dropped. Therefore, the product should not be dropped. Another way ofsaying this is that the company is actually currently making $140,000 on thisproduct.
working notes for the above answer is as under
| At prasent | If Product V41B is discontinued |
Diffrance | |
| Sales | 926000 | 0 | |
| Less; | |||
| Variable Expenses | 407000 | 0 | 407000 |
| Contribution Margine | 519000 | 0 | 519000 |
| Less; | 0 | ||
| Fixed manufacturing expenses | 340,000 | 131,000 | 209000 |
| Fixed selling and administrative expenses |
247,000 | 127,000 | 120000 |
| Net Operating Income | -68,000 | -258,000 | -190,000 |
