The management of Heider Corporation is considering dropping product J14V. Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $211,000 of the fixed manufacturing expenses and $172,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued. What would be the effect on the company's overall net operating income if product J14V were dropped?
A)Overall net operating income would decrease by $55,000.
B)Overall net operating income would increase by $160,000.
C)Overall net operating income would increase by $55,000.
D)Overall net operating income would decrease by $160,000.

Question

The management of Heider Corporation is considering dropping product J14V. Data from the company's accounting system appear below:  In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $211,000 of the fixed manufacturing expenses and $172,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued. What would be the effect on the company's overall net operating income if product J14V were dropped?
A)Overall net operating income would decrease by $55,000. 
B)Overall net operating income would increase by $160,000. 
C)Overall net operating income would increase by $55,000. 
D)Overall net operating income would decrease by $160,000.

Quizplus · Accepted Answer

The total avoidable fixed expenses from dropping product J14V are $383,000 ($211,000 + $172,000). Therefore, if the product is dropped, the company's overall net operating income would increase by $160,000 ($543,000 - $383,000). Hence, the correct answer is D, which states that the overall net operating income would decrease by $160,000 if the product J14V were dropped (the opposite of the correct answer).

The Management of Heider Corporation Is Considering Dropping Product J14V