The management of Heider Corporation is considering dropping product H58S. Data
ID: 2468307 • Letter: T
Question
The management of Heider Corporation is considering dropping product H58S. 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 $235,000 of the fixed manufacturing expenses and $196,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the company's overall net operating income if product H58S were dropped?Explanation / Answer
Contribution margin from H58S = Sales - Variable expenses = $ 930,000 - $ 389,000 = $ 541,000
Fixed costs that can be avoided if H58S is dropped = $ 235,000 + $ 196,000 = $ 431,000
Effect on company's overall net operating income if product H58S were dropped = Saving in fixed cost - Contribution margin lost = $ 431,000 - $ 541,000 = $ (110,000)
Therefore overall net income would decrease by $ 110,000.
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