Question

The management of Heider Corporation is considering dropping product J14V. Data from the company's accounting system appear below:
Sales: $980,000
Variable expenses: $394,000
Fixed manufacturing expenses: $376,000
Fixed selling and administrative expenses : $256,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $245,000 of the fixed manufacturing expenses and $206,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued. What would be the effect on the company's overall net operating income if product J14V were dropped?

Answer 1

Answer:

financial disadvantage of dropping product J14V = $135,000, so net operating income would decrease by that amount

Explanation:

net loss generated by product J14V = $980,000 - $394,000 - $376,000 - $256,000 = ($46,000)

unavoidable fixed costs:

Fixed manufacturing expenses = $376,000  - $245,000 = $131,000

Fixed selling and administrative expenses = $256,000 - $206,000 = $50,000

total unavoidable fixed costs = $181,000

the overall effect = total unavoidable fixed costs - net loss = $181,000 - (-$46,000) = $135,000 financial disadvantage since unavoidable costs are higher than current losses