Question

The management of Heider Corporation is considering dropping product J14V. Data from the company's accounting system appear below: Sales $980,000 Variable expenses $402,000 Fixed manufacturing expenses $384,000 Fixed selling and administrative expenses $264,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $261,000 of the fixed manufacturing expenses and $222,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued.

What would be the effect on the company's overall net operating income if product J14V were dropped?
a.) Overall net operating income would increase by $95,000.
b.) Overall net operating income would decrease by $95,000.
c.) Overall net operating income would increase by $70,000.
d.) Overall net operating income would decrease by $70,000.

Answer 1

Effect on income= $95,000 decrease

Step-by-step explanation:

To calculate the effect on the income of dropping product J14V, we need to use the following formula:

Effect on income= avoidable fixed costs - contribution margin

avoidable fixed costs= 261,000 + 222,000

avoidable fixed costs= $483,000

Effect on income= 483,000 - 578,000

Effect on income= $95,000 decrease