Question

The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below: Sales $933,000 Variable expenses $410,500 Fixed manufacturing expenses $522,500 Fixed selling and administrative expenses $347,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $212,500 of the fixed manufacturing expenses and $123,500 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

Answer 1

Answer:

$186,500 decrease

Explanation:

The computation of the effect in case when the product V41B is dropped is shown below:

We need to compare the cost between the current profits and the fixed cost incurred which is

Current profits =  Sales - Variable costs - Fixed manufacturing expenses - Fixed selling and administrative expenses

= $933,000 - $410,500 - $522,500 - $347,000

= ($347,000)

Now fixed costs incurred is

= ($522,500 - $212,500) + ($347,000 - $123,500)

= $310,000 + $223,500

= $533,500

Since the fixed cost is more than the current profits, so the net operating income would be decreased by

= $533,500 - $347,000

= $186,500