Final answer:
The net operating income for product D14E is a loss of $60,000. Dropping product D14E would result in an increase to income of $255,000 for Suire Corporation due to the avoidance of certain fixed expenses. Therefore, the product should be dropped.
Step-by-step explanation:
Net Operating Income of Product D14E
To calculate the net operating income earned by product D14E, we need to subtract the variable and fixed expenses from sales. Therefore, the net operating income is:
Sales: $750,000
Variable Expenses: -$346,000
Fixed Manufacturing Expenses: -$258,000
Fixed Selling and Administrative Expenses: -$206,000
Net Operating Income: $750,000 - $346,000 - $258,000 - $206,000 = -$60,000.
The product D14E is currently resulting in a net operating loss of $60,000.
Impact on Income if Product D14E is Dropped
If product D14E is dropped, only avoidable fixed expenses should be considered for the calculation. The total avoidable fixed expenses amount to:
Avoidable Fixed Manufacturing Expenses: $200,000
Avoidable Fixed Selling and Administrative Expenses: $115,000
Total Avoidable Fixed Expenses: $200,000 + $115,000 = $315,000.
Since the product is operating at a loss, dropping the product would result in an increase in income equal to the amount of the loss being avoided (the net loss plus the avoidable expenses):
Increase to Income of Dropping Product D14E: -$60,000 (current loss) + $315,000 (avoidable expenses) = $255,000.
Therefore, Suire Corporation would see an increase to income of $255,000 if product D14E is dropped, suggesting that the product should indeed be dropped.