The management of Freshwater Corporation is considering dropping product C11B. D
ID: 2490951 • Letter: T
Question
The management of Freshwater Corporation is considering dropping product C11B. 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 $206,000 of the fixed manufacturing expenses and $117,000 of the fixed selling and administrative expenses are avoidable If product C11B Is discontinued. What would be the effect on the company's overall net operating income If product C11B were dropped? Overall net operating income would decrease by $193,000. Overall net operating income would increase by $59,000. Overall net operating income would decrease by $59,000. Overall net operating income would increase by $193,000.Explanation / Answer
Keep the product
Drop the product
Difference
Sales
$920,000
0
(920,000)
Variable expenses
404,000
0
404,000
Contribution margin
516,000
0
(516,000)
Less:Fixed expenses
Fixed manufacturing expenses
334,000
128,000
206,000
Fixed selling and administrative expense
241,000
124,000
117,000
Total fixed expense
575,000
252,000
323,000
Net operating income (loss)
(59,000)
252,000
(193,000)
Net overall operating income will decrease by 193,000
Keep the product
Drop the product
Difference
Sales
$920,000
0
(920,000)
Variable expenses
404,000
0
404,000
Contribution margin
516,000
0
(516,000)
Less:Fixed expenses
Fixed manufacturing expenses
334,000
128,000
206,000
Fixed selling and administrative expense
241,000
124,000
117,000
Total fixed expense
575,000
252,000
323,000
Net operating income (loss)
(59,000)
252,000
(193,000)
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