the management of austion corporation is considering dropping product R97C.Data

Question

the management of austion corporation is considering dropping product R97C.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 34000 of fixed manufacturing exoenses and 20000 of the fixed selling and administrative expesnses are avoidable if product R97C us discontinued. what would be the effect on the company's overall net operating income if product R97C were dropped?

sales 130000 variable expenses 56000 fixed manufacturing expenses 49000 fixed selling and administrative expense 35000

Explanation / Answer

If product R97C is discontinued, the overall net operating income will fall by $ 20,000, as this particular product was contributing $ 20,000 to the total profit.

Workings:

Contribution margin Income Statement

Unavoidable fixed cost is not relevant for decision making in this case.

$ Sales 130,000 Variable expenses 56,000 Contribution margin 74,000 Less avoidable fixed cost ( 34,000 + 20,000) 54,000 Net income 20,000

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