Question

A study has been conducted to determine if product a should be dropped. sales of the product total $500,000 per year; variable expenses total $340,000 per year. fixed expenses charged to the product total $220,000 per year. the company estimates that $180,000 of these fixed expenses will continue even if the product is dropped. these data indicate that if product a is dropped, the company's overall net operating income would:

Answer 1

Keep the product:
Sales $500,000Variable Expenses 340,000
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Contribution Margin 160,000
Fixed Manufacturing 220,000
Net operating income (60,000)

Drop the product:
Sales $0
Variable Expenses 0
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Contribution Margin 0
Fixed Manufacturing 180,000
Net operating income (180,000)

Difference of keep and drop the product would be:Sales ($500,000)
Variable Expenses 340,000
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Contribution Margin (160,000)
Fixed Manufacturing 40,000
Net operating income (20,000)

Therefore, net operating income would decrease by $20,000 if Product A were dropped.