The management of Kabanuck Corporation is considering dropping product V41B. Dat
ID: 2587257 • Letter: T
Question
The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below: Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses $938,000 $413,000 $525,000 $352,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $215,000 of the fixed manufacturing expenses and $126,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued What would be the effect on the company's overall net operating income if product V41B were dropped? Overall net operating income would increase by $184,000. Overall net operating income would decrease by $184,000. O Overall net operating income would increase by $86,000. Overall net operating income would decrease by $86,000Explanation / Answer
Answer:
1
Over all net operating income would decreased by$184,000
Working notes for the above answer is as under
Sales
$938,000
Variable expenses
$413,000
Contrinution
$525,000
overall net operating income if product V41B were dropped
=contribution forgone - fixed cost saved
=(525000)+215000+126000
=(184000)
_______________________________
2
Increse by $86400
Working notes for the above answer is as under
Production of Wheels
Make
Buy
Total
per unit
Total
per unit
Direct Materials
54000
0.20
Direct Labor
81000
0.30
Variable overhead
40500
0.15
Total variable cost
175500
0.65
216000
0.8
Fixed overhead
77000
45000
Rental benefit
-94900
Total Cost
252500
166100
Incremental benefit in buying
86400
_____________________________________
3
Net operating loss
($92,000)
Working notes for the above answer is as under
Sales
$939,000
Variable expenses
$418,000
Contrinution
$521,000
less:
Fixed manufacturing expenses
$353,000
Fixed selling and administrative expenses
$260,000
Net operating loss
($92,000)
Sales
$938,000
Variable expenses
$413,000
Contrinution
$525,000
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