Question

The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below: Sales $890,000 Variable expenses $374,000 Fixed manufacturing expenses $329,000 Fixed selling and administrative expenses $258,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $184,000 of the fixed manufacturing expenses and $200,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued. What would be the effect on the company's overall net operating income if product V41B were dropped?

Answer 1

If the product were dropped, the decrease in income of the company as a whole will be of $132,000

Step-by-step explanation:

Giving the following information:

Sales $890,000

Variable expenses $374,000

Fixed manufacturing expenses $329,000

Fixed selling and administrative expenses $258,000

Further investigation has revealed that $184,000 of the fixed manufacturing expenses and $200,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued.

To calculate the effect on income, we need to account for the positive contribution margin lost and the fixed costs that will remain in the company.

First, we will determine the actual operating income:

Contribution margin= 516,000

Fixed manufacturing expenses= (329,000)

Fixed selling and administrative expenses= (258,000)

Net operating income= (71,000)

If the product were dropped:

Fixed manufacturing expense= 145,000

Fixed selling and administrative expenses= 58,000

Total fixed expense= $203,000

Difference= 203,000 - 71,000= 132,000

If the product were dropped, the decrease in income of the company as a whole will be of $132,000