The management of Freshwater Corporation is considering dropping product C11B. D
ID: 2654674 • Letter: T
Question
The management of Freshwater Corporation is considering dropping product C11B. Data from the company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $209,500 of the fixed manufacturing expenses and $120,500 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued.
What would be the effect on the company's overall net operating income if product C11B were dropped?
Overall net operating income would decrease by $189,500.
Overall net operating income would increase by $69,500.
Overall net operating income would decrease by $69,500.
Overall net operating income would increase by $189,500.
The management of Freshwater Corporation is considering dropping product C11B. Data from the company's accounting system appear below:
Explanation / Answer
Overall impact on net operating income = Reduction in fixed overhead - Total Contribution
= (Reduction in Fixed manufacturing expenses + Reduction in Fixed selling and administrative expenses) - (Drop in Sales - Reduction in Variable cost)
= ($209,500 + $120,500) - ($927,000 - $407,500)
= -$189,500
Overall net operating income would decrease by $189,500
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