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

The contribution margin per unit of product V41B is $3. If the company drops this product, it will lose the contribution margin on each unit sold. The question mentions that the company sold 44,000 units of product V41B, so dropping this product would result in a decrease in net operating income of:

44,000 units x $3 contribution margin per unit = $132,000

Therefore, the correct answer is C.

The Management of Kabanuck Corporation Is Considering Dropping Product V41B