Question

The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system appear below: Sales $830,000 Variable expenses $390,000 Fixed manufacturing expenses $266,000 Fixed selling and administrative expenses $232,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued. What would be the effect on the company's overall net operating income if product D74F were dropped? 1. Overall net operating income would increase by $226,000. 2. Overall net operating income would increase by $58,000. 3. Overall net operating income would decrease by $226,000. 4. Overall net operating income would decrease by $58,000.

Answer 1

3. Overall net operating income would decrease by $226,000

Step-by-step explanation:

The computation of net operating income is shown below:-

Sales = $830,000

Variable Expenses = $390,000

Contribution = Sales - Variable expenses

= $440,000

Net Profit = Contribution - Fixed Manufacturing expenses - Fixed Selling & administrative expenses

= $440,000 - $111,000 - $103,000

= $440,000 - $103,000

= $226,000