The management of Thors Corporation is considering droppping product F275. Data

Question

The management of Thors Corporation is considering droppping product F275. Data from the company's acounting system appear below.

Sales = $700,000; Variable expenses = $380,000; Fixed Manufacturing Expenses = $195,000; Fixed Selling and Administrative Expenses = $150,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $75,000 of the fixed manufacturing expenses and $25,000 of the fixed selling and administrative expenses are avoidable if product F275 is discontinued.

i. What is the net operatingincome earned by product F275 according to the company's accounting system? Show your work.

ii. What would be the effect on the company's overall net operating income of dropping product F275? Should the product be dropped? Show your work.

Explanation / Answer

Keep Drop Difference the the Product product Sales 700000 0 -700000 Variable Expenses 380000 0 380000 Contribution Margin 320000 0 -320000 Fixed expenses 0 Fixed manufacturing expenses 195000 120000 75000 Fixed selling and Administrative expense 150000 125000 25000 Total Fixed Expenses 345000 245000 100000 Net Operating income ( Loss ) -25000 -245000 -220000 Net operating income would decline by $220000 if product F275 were dropped. Therefore, the product should not be dropped. *$195000 - $75000 = $120000 **$150000 - $25000 = $125000

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