The management of Fannin Corporation is considering dropping product H58S. Data

Question

The management of Fannin Corporation is considering dropping product H58S. Data from the company's accounting system appear below: Sales $950,000 Variable expenses $396,000 Fixed manufacturing expenses $378,000 Fixed selling and administrative expenses $258,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $249,000 of the fixed manufacturing expenses and $210,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the company's overall net operating income if product H58S were dropped?

Overall net operating income would decrease by $82,000.

Overall net operating income would increase by $82,000.

Overall net operating income would increase by $95,000.

Overall net operating income would decrease by $95,000.

Explanation / Answer

Income Statement H58S Particulars Amount Sales 950000 Variable expenses 396000 Fixed Manufacturing expenses 378000 Fixed Selling & Admin Expenses 258000 Operating Loss -82000 After Droping product H58S Particulars Amount Amount unavoidable Fixed cost charged to other products Fixed Manufacturing cost Earlier 378000 Saved 249000 Charge to other asset 129000 Fixed selling expenses Earlier 258000 Saved 210000 Charge to other asset 48000 Total 177000 Before drping After Droping Net effect Net decrease on Operating profit -82000 -177000 -95000 Answer : Correct option is Overall net operating income would decrease by $95,000.

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