Question

The management of Heider Corp is considering dropping product A. Data from the company's accounting records is below: Sales: 920,000, VE: 377,000, Fixed Manufacturing Expenses: 359,000, Fixed Selling and Administrative Expenses: 239,000. In the company's accounting system, all fixed expenses of the company are allocated to products. Further investigation revealed that 211,000 of the fixed manufacturing expenses and 172,000 of the fixed selling and administrative expenses are avoidable if product A is dropped. What would be the effect on the company's overall Net Operating Income (NOI) if product A was dropped?

1) NOI would decrease by 55,000
2) NOI would increase by 160,000
3) NOI would increase by 55,000
4) NOI would decrease by 160,000

Answer 1

1) NOI would increase by 55,000. Dropping product A reduces avoidable fixed expenses, resulting in a net increase in Net Operating Income.

Step-by-step explanation:

Dropping product A would result in avoiding certain fixed expenses. The avoidable fixed manufacturing expenses are 211,000, and the avoidable fixed selling and administrative expenses are 172,000. The total avoidable fixed expenses would be 211,000 + 172,000 = 383,000. Subtracting this amount from the total fixed expenses of 359,000 (manufacturing) + 239,000 (selling and administrative) gives us the net savings of 383,000 - (359,000 + 239,000) = -215,000.

Since these are avoidable expenses, the company's Net Operating Income (NOI) would increase by the amount saved, which is 215,000. However, it's important to note that this represents an increase in income, not a decrease. Therefore, the correct answer is that NOI would increase by 55,000.

In summary, dropping product A would result in cost savings, leading to an increase in Net Operating Income by 55,000. This decision would positively impact the company's overall financial performance.