Tjelmeland Corporation is considering dropping product S85U. Data from the compa

Question

Tjelmeland Corporation is considering dropping product S85U. Data from the company's accounting system appear below.


Sales $360,000
Variable Expenses $158,000
Fixed Manufacturing Expenses $119,000
Fixed Selling and Administrative Expenses $94,000
i.
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $55,000 of the fixed manufacturing expenses and $71,000 of the fixed selling and administrative expenses are avoidable if product S85U is discontinued.

Required:

i. According to the company's accounting system, what is the net operating income earned by product S85U? Show your work!

ii. What would be the effect on the company's overall net operating income of dropping product S85U? Should the product be dropped? Show your work!

Explanation / Answer

i. net operating income = sales -Variable Expenses-Fixed Manufacturing Expenses-Fixed Selling and Administrative Expenses =$360,000 -$158,000 - $119,000 - $94,000 = -$11,000.00 ii. New net operating income = -($119,000 -$55,000) - ($94,000 -$71,000 ) =-87000 No the product should not be dropped

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