Question

Sales $920,000 Variable expenses $388,000 Fixed manufacturing expenses $370,000 Fixed selling and administrative expenses $250,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $233,000 of the fixed manufacturing expenses and $194,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the company's overall net operating income if product H58S were dropped?

Answer 1

Answer:

The company would have a greater net operating income of $339,000 if the product H58S were dropped.

Explanation:

The net operating income can be expressed as;

a). If product H58S is not dropped

Net operating income=income from sales-Total expenses

where;

Income from sales=$920,000

Total expenses=Net fixed expenses+variable expenses

Fixed expenses=Fixed manufacturing expenses+Fixed selling and administrative expenses=(370,000+250,000)=$620,000

Variable expenses=$388,000

Total expenses=(620,000+388,000)

Total expenses=$1,008,000

Net operating income=(920,000-1,008,000)=-$88,000

b). If product H58S is dropped

Income from sales=$920,000

Total expenses=Net fixed expenses+variable expenses

Fixed expenses=Fixed manufacturing expenses+Fixed selling and administrative expenses=(370,000+250,000)=$620,000

Net fixed expenses=(620,000)-(233,000+194,000)

Net fixed expenses=$193,000

Variable expenses=$388,000

Total expenses=193,000+388,000= $581,000

Replacing;

Net operating income=(920,000-581,000)

Net operating income=$339,000

The company would have a greater net operating income of $339,000 if the product H58S were dropped.