3. TCOD) The management of Thews Corporation is considering dropping product E28

Question

3. TCOD) The management of Thews Corporation is considering dropping product E28I. 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 $86,000 of the fixed manufacturing expenses and $67,000 of the fixed selling and administrative expenses are avoidable if product E28I is discontinued.

• Sales ………$ 480,000
• Variable expenses…..$ 202,000
• Fixed manufacturing expenses…..$ 158,000
• Fixed selling and administrative expenses… $ 130,000




Required:

i. What is the net operating income earned by product E28I according to the company's accounting system? Show your work!

ii. What would be the effect on the company's overall net operating income of dropping product E28I? Should the product be dropped? Show your work!

Explanation / Answer

i) • Sales ………$ 480,000 • less Variable expenses…..$ 202,000 • less Fixed manufacturing expenses…..$ 158,000 • less Fixed selling and administrative expenses… $ 130,000 Net operating income = (10000) answer ii)• Sales ………$ 480,000 • less Variable expenses…..$ 202,000 • lessFixed manufacturing expenses…..$ 158,000 - 86000 • less Fixed selling and administrative expenses… $ 130,000 - 67000 Net operating income = 143000answer

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