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.
-What would be the effect on the company's overall net operating income if product R10C were dropped?
A) Overall net operating income would decrease by $28,000.
B) Overall net operating income would decrease by $45,000.
C) Overall net operating income would increase by $28,000.
D) Overall net operating income would increase by $45,000.

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.
-What would be the effect on the company's overall net operating income if product R10C were dropped?
A) Overall net operating income would decrease by $28,000. 
B) Overall net operating income would decrease by $45,000. 
C) Overall net operating income would increase by $28,000. 
D) Overall net operating income would increase by $45,000.

Quizplus · Accepted Answer

If product R10C is dropped, the avoidable fixed expenses of $90,000 ($42,000 + $48,000) would be saved. However, the contribution margin of $45,000 ($120,000 - $75,000) that the product was providing would also be lost. Therefore, the overall net operating income would decrease by $45,000.

The Management of Zorrilla Corporation Is Considering Dropping Product R10C