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The management of Freshwater Corporation is considering dropping product C11B. D

ID: 2497358 • 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 $216,500 of the fixed manufacturing expenses and $127,500 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?

a.Overall net operating income would decrease by $90,500.

b.Overall net operating income would increase by $90,500.

c.Overall net operating income would decrease by $182,500.

d.Overall net operating income would increase by $182,500.

The management of Freshwater Corporation is considering dropping product C11B. Data from the company's accounting system appear below:

Explanation / Answer

Relevant cost of Manufacturing = Variable expenses + Avoidable Fixed manufacturing expenses + Avodable Fixed selling and administrative expenses

Relevant cost of Manufacturing = 414500 + 216500 + 127500

Relevant cost of Manufacturing = 758500

Company's overall net operating income if product C11B were dropped = Saving in Relevant cost of Manufacturing - Sale Revenue lost

Company's overall net operating income if product C11B were dropped = 758500 - 941000

Company's overall net operating income if product C11B were dropped = - 182500

Answer

c.Overall net operating income would decrease by $182,500.