A study has been conducted to determine if Product A should be dropped. Sales of

Question

A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $50,000 of these fixed expenses will saved if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would:

A) decrease by $20,000 per year.

B) increase by $20,000 per year.

C) decrease by $10,000 per year.

D) increase by $30,000 per year.

Explanation / Answer

A) decrease by $20,000 per year.

Lost CM = $200,000 - $140,000 = (60,000)

Avoidable costs = $90,000 - $50,000 = $40,000

Decreased Operating Income = Lost CM + Avoidable costs = -$60,000 + $40,000 = -$20,000

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