Question

The management of Freshwater Corporation is considering dropping product C11B. Data from the company's accounting system appear below: Sales $928,000 Variable expenses $408,000 Fixed manufacturing expenses $342,000 Fixed selling and administrative expenses $249,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $210,000 of the fixed manufacturing expenses and $121,000 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued. What would be the effect on the company's overall net operating income if product C11B were dropped?

Answer 1

Effect on income= (189,000) or $189,000 decrease

Step-by-step explanation:

Giving the following information:

Sales $928,000

Variable expenses (408,000)

Fixed manufacturing expenses (342,000)

Fixed selling and administrative expenses (249,000)

Net loss= (71,000)

Further investigation has revealed that $210,000 of the fixed manufacturing expenses and $121,000 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued.

To calculate the effect on income, we need to use the following formula:

Effect on income= unavoidable fixed costs - net income

Effect on income= -(132,000 + 128,000) + 71,000

Effect on income= (189,000)