Product R19N has been considered a drag on profits at Buzzeo Corporation for som

Question

Product R19N has been considered a drag on profits at Buzzeo Corporation for some time and management is considering discontinuing the product altogether. Data from the company's accounting system appear below:

Sales $270,000
Virable Expenses 132,000
Fixed manufacturing expenses 95,000
Fixed selling and adminstartive expenes 65,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $49,000 of the fixed manufacturing expenses and $30,000 of the fixed selling and administrative expenses are avoidable if product R19N is discontinued. What would be the effect on the company's overall net operating income if product R19N were dropped?

Explanation / Answer

They would lose the contribution margin of 270,000 - 132,000 = 138,000. They would only avoid expenses of 49,000 + 30,000 = 79,000. The loss of CM of 138,000 would be a decrease. The loss of expenses of 79,000 would be an increase. For a net effect of -138,000 + 79,000 = -59,000 Answr: net income would decrease by 59,000

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