A company\'s management is considering dropping PM27. Data about this company ap

Question

A company's management is considering dropping PM27. Data about this company appear below: $211,000 of the fixed manufacturing expenses and $172,000 of the fixed selling and administrative expenses could be avoided. If the product PM27 is discounted. What would be the effect on the company's overall net operating income if product PM27 were dropped? Overall net operating income would decrease by $55,000. Overall net operating income would increase by $160,000. Overall net operating income would increase by $55,000. Overall net operating income would increase by $160,000.

Explanation / Answer

Answer:

In absence of any specific information it is assumed that the whole data given in the question is only in relation to product PM27.

Now, if the product PM27 is dropped then,

Decrease in Sales Revenue                                                  = ($ 920,000)

Saving in Variable Expenses                                                = $ 377,000

Saving in Fixed Manufacturing Expenses                            = $ 211,000

Saving in Fixed Selling & Administration Expenses             = $ 172,000

Net Saving / (Loss of Revenue) if product PM 27 is dropped = ($ 160,000)

Thus, the Company's overall net operating income would decrease by $ 160,000 if the product PM27 is dropped. The correct answer is option d.

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