The management of Branner Corporation is considering dropping product S35K. Data
ID: 2421053 • Letter: T
Question
The management of Branner Corporation is considering dropping product S35K. Data from the company's accounting system appear below.
Sales
$900,000
Variable Expenses
$475,000
Fixed Manufacturing Expenses
$200,000
Fixed Selling and Administrative Expenses
$133,000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $100,000 of the fixed manufacturing expenses and $75,000 of the fixed selling and administrative expenses are avoidable if product S35K is discontinued.
Required:
i. According to the company's accounting system, what is the net operating income earned by product S35K? Show your work!
ii. What would be the effect on the company's overall net operating income of dropping product S35K? Should the product be dropped? Show your work!
Sales
$900,000
Variable Expenses
$475,000
Fixed Manufacturing Expenses
$200,000
Fixed Selling and Administrative Expenses
$133,000
Explanation / Answer
(i)
Net operating income = Sales - Variable expenses - Total fixed expenses
= $(900,000 - 475,000 - 200,000 - 133,000) = $92,000
(ii)
If the product is dropped, Total fixed expenses decrease by $(100,000 + 75,000) = $175,000. So, Net operating income will increase by $175,000.
New net operating income = $(92,000 + 175,000) = $267,000
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