Question

A study has been conducted to determine if product a should be dropped. total sales of the product are $200,000 per year; total variable expenses are $140,000 per year. total fixed expenses charged to the product are $90,000 per year. the company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. these data indicate that if product a is dropped, the company's overall operating income per year would change by how much?

a. an increase of $20,000.
b. a decrease of $20,000.
c. an increase of $30,000.
d. a decrease of $10,000.

Answer 1

By discontinuing Product A, the company will save on variable expenses but lose sales revenue. After accounting for the non-avoidable fixed expenses, the net result will be a decrease in operating income by $10,000.

Step-by-step explanation:

The student is asking about the impact of discontinuing a product on the company's overall operating income. To determine this, we analyze the given data:
Total sales (revenue) are $200,000, total variable expenses are $140,000, and total fixed expenses attributable to the product are $90,000, out of which $40,000 will remain even if the product is dropped. The net operating income from the product is currently Revenue - Variable Expenses - Fixed Expenses. If the product is dropped the new operating income effect will be the saved variable expenses minus the non-avoidable fixed expenses. So, $140,000 saved on variable expenses minus $50,000 in avoidable fixed expenses gives us a net reduction in costs of $90,000. Since the product was generating $200,000 in sales, losing this revenue minus the saved costs results in a decrease in overall operating income. Therefore, the correct answer is a decrease of $10,000 in operating income.