The management of Zorrilla Corporation is considering dropping product R10C. 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 $42,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product R10C is discontinued.
-According to the company's accounting system, what is the net operating income earned by product R10C?
A) ($28,000)
B) $28,000
C) $135,000
D) ($135,000)

Question

The management of Zorrilla Corporation is considering dropping product R10C. 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 $42,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product R10C is discontinued.
-According to the company's accounting system, what is the net operating income earned by product R10C?
A) ($28,000) 
B) $28,000 
C) $135,000 
D) ($135,000)

Quizplus · Accepted Answer

According to the company's accounting system, the net operating income earned by product R10C is $14,000 (sales revenue of $70,000 minus variable expenses of $42,000 for direct materials, direct labor, and variable manufacturing overhead, minus $14,000 in fixed manufacturing overhead allocated to R10C, minus $4,000 in fixed selling and administrative expenses allocated to R10C). However, if product R10C is discontinued, the company can avoid $42,000 in fixed manufacturing expenses and $48,000 in fixed selling and administrative expenses. This means that the total cost savings would be $42,000 + $48,000 = $90,000, and the net operating income would increase by this amount if product R10C is dropped. Therefore, the net operating income earned by product R10C as it is currently being produced is ($14,000) + $90,000 = ($28,000). Option A is correct.

The Management of Zorrilla Corporation Is Considering Dropping Product R10C