The sole owner of a company is considering dropping product NEMO. She provides y

Question

The sole owner of a company is considering dropping product NEMO. She provides you with the data below:

All fixed expenses of the company are fully allocated to products at this company. The owner has determined that $233,000 of the fixed manufacturing expenses and $194,000 of the fixed selling and administrative expenses are avoidable if the company discontinues product NEMO.

If product NEMO were to be dropped, what would be the effect on the company's overall net operating income?

Overall net operating income would decrease by $105,000.

Overall net operating income would increase by $88,000.

Overall net operating income would decrease by $88,000.

Overall net operating income would increase by $105,000.

Sales $ 920,000 Variable expenses $ 388,000 Fixed manufacturing expenses $ 370,000 Fixed selling and administrative expenses $ 250,000

Explanation / Answer

Solution:

Contribution from product Nemo = $920,000 - $388,000 = $532,000

Avoidable fixed cost on drop of product Nemo = $233,000 + $194,000 = $427,000

In company discontinue product Nemo, than it can save fixed cost of $427,000 but will loose contribution margin of $532,000

Hence overall net operating income of the company will decrease by = $532,000 - $427,000 = $105,000 on drop of Product Nemo.

Hence first option is correct.

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