A study has been conducted to determine if Product A should be dropped. Sales of

Question

A study has been conducted to determine if Product A should be dropped. Sales of the product total $210,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would:

Select one:

a. decrease by $20,000 per year

b. increase by $20,000 per year

c. decrease by $10,000 per year

d. increase by $30,000 per year

Explanation / Answer

Answer: c. decrease by $10,000 per year

Particulars Keep Drop Difference Sales 200000 0 -200000 Lost revenue Variable expenses 140000 0 -140000 Save Contribution 60000 0 -60000 Lost contribution Fixed expenses 90000 40000 -50000 Save Net operating income -30000 -40000 -10000 Net change in income

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