Question

) A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $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 net operating income would: 6) A) decrease by $10,000 per year. B) increase by $30,000 per year. C) increase by $20,000 per year. D) decrease by $20,000 per year.

Answer 1

A) decrease by $10,000 per year.

Step-by-step explanation:

To make a decision whether or not to drop a product, the following relevant cash flows will be important:

1. The lost contribution as a result of dropping the product
2. The savings in specific fixed costs arising from the decision

Contribution = Sales - Variable cost

Contribution = 200,000 - 140,000

= $60,000

Savings in specific fixed cost = 90000- 40000

= $50,000

Net position (decrease in operating income)

= 60,000 - 50000

= $10,000

A) decrease by $10,000 per year.