Management of Dustin Corporation is considering dropping product R97c. Data from

Question

Management of Dustin Corporation is considering dropping product R97c. Data from the company's accounting system appear below:

Sales $130,000

Variable expenses 56,000

Fixed manufacturing expenses 49,000

Fixed selling & administrative expenses 35,000

In the company's accounting system all fixed expenses of the company are fully allocated to product. Further investigation has revealed that $34,000 of the fixed manufacturing expenses and $20,000 of the fixed selling and administrative expenses are avoidable if product R97c is discontinued. what would be the effect on the company's overall net operating income if product R97C were dropped?

a. overall net operating income would increase by $20,000

b, overall net operating income would increase by $10,000

c. Overall net operating income would decrease by $20,000

d. overall net operating income would decrease by $10,000

Explanation / Answer

Loss in Contribution margin -74000 =130000-56000 Fixed manufacturing expenses avoidable 34000 Fixed selling and administrative expenses avoidable 20000 Effect on net operating income   -20000 Overall net operating income would decrease by $20,000

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