Question

The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below: Sales $922,000 Variable expenses $405,000 Fixed manufacturing expenses $517,000 Fixed selling and administrative expenses $336,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $207,000 of the fixed manufacturing expenses and $118,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued. What would be the effect on the company's overall net operating income if product V41B were dropped?

Answer 1

	Keep the product	Drop the product	Difference
Sales	$922,000	$0	($922,000)
Variable Expenses	($405,000)	$0	$405,000
Contribution margin	$517,000	$0	($517,000)
Less : Fixed expenses
Fixed manufacturing expenses	($517,000)	($310,000)	$207,000
Fixed selling and administrative expenses	($336,000)	($218,000)	$118,000
Total Fixed expenses	($853,000)	($528,000)	$325,000
Net Operating income	($336,000)	($528,000)	($192,000)

Drop the product

Fixed manufacturing expenses = $517,000 - $207,000

= $310,000

Fixed selling and administrative expenses = $336,000 - $118,000

= $218,000

If product V41B were dropped, net operating income decreases by $192,000.