The management of Kabanuck Corporation is considering dropping product V41B.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 $184, 000 of the fixed manufacturing expenses and $200, 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?
A)Overall net operating income would increase by $71, 000.
B)Overall net operating income would increase by $132, 000.
C)Overall net operating income would decrease by $132, 000.
D)Overall net operating income would decrease by $71, 000.

Question

The management of Kabanuck Corporation is considering dropping product V41B.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 $184, 000 of the fixed manufacturing expenses and $200, 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?
A)Overall net operating income would increase by $71, 000. 
B)Overall net operating income would increase by $132, 000. 
C)Overall net operating income would decrease by $132, 000. 
D)Overall net operating income would decrease by $71, 000.

Quizplus · Accepted Answer

If product V41B is dropped, the company will be able to avoid $184,000 of fixed manufacturing expenses and $200,000 of fixed selling and administrative expenses. Thus, the total fixed expenses that can be avoided are $384,000 ($184,000 + $200,000). Since all fixed expenses are fully allocated to products, the entire $384,000 will be savings if this product is dropped. Therefore, if the product is discontinued, the company's overall net operating income will decrease by the amount of the contribution margin from this product, which is $252,000 ($600,000 - $348,000). This means that the overall net operating income will decrease by $132,000 ($252,000 - $384,000).

The Management of Kabanuck Corporation Is Considering Dropping Product V41B