Question

The management of Fannin Corporation is considering dropping product H58S. Data from the company's accounting system appear below: 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? Overall net operating income would decrease by $88,000.Overall net operating income would increase by $88,000.Overall net operating income would increase by $105,000.Overall net operating income would decrease by $105,000.

Answer 1

The correct answer is D.

Step-by-step explanation:

Giving the following information:

Sales $920,000

Variable expenses $388,000

Fixed manufacturing expenses $370,000

Fixed selling and administrative expenses $250,000

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.

Current loss= 920,000 - 388,000 - 370,000 - 250,000= -88,000

If H58S gets discontinued:

Operating income= 88,000 - (370,000 - 233,000) - (250,000 - 194,000)= -105,000

The income will decrease $105,000