The management of Dorl Corporation has been concerned for some time with the financial performance of its product I54J and has considered discontinuing it on several occasions. 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 $95,000 of the fixed manufacturing expenses and $85,000 of the fixed selling and administrative expenses are avoidable if product I54J is discontinued.
-What would be the effect on the company's overall net operating income if product I54J were dropped?
A) Overall net operating income would decrease by $177,000.
B) Overall net operating income would increase by $177,000.
C) Overall net operating income would increase by $14,000.
D) Overall net operating income would decrease by $14,000.

Question

The management of Dorl Corporation has been concerned for some time with the financial performance of its product I54J and has considered discontinuing it on several occasions. 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 $95,000 of the fixed manufacturing expenses and $85,000 of the fixed selling and administrative expenses are avoidable if product I54J is discontinued.
-What would be the effect on the company's overall net operating income if product I54J were dropped?
A) Overall net operating income would decrease by $177,000. 
B) Overall net operating income would increase by $177,000. 
C) Overall net operating income would increase by $14,000. 
D) Overall net operating income would decrease by $14,000.

Quizplus · Accepted Answer

If product I54J were dropped, the company would lose the contribution margin that product I54J provides, which is $177,000. Therefore, the overall net operating income would decrease by this amount.

The Management of Dorl Corporation Has Been Concerned for Some