Question

1. The management of Fannin Corporation is considering dropping product H58S. Data from the company's accounting system appear below:

Sales	$980,000
Variable expenses	$394,000
Fixed manufacturing expenses	$376,000
Fixed selling and administrative expenses	$256,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $245,000 of the fixed manufacturing expenses and $206,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the company's overall net operating income if product H58S were dropped?

A. Overall net operating income would decrease by $46,000.

B. Overall net operating income would increase by $46,000.

C. Overall net operating income would increase by $135,000.

D. Overall net operating income would decrease by $135,000.

Answer 1

Answer:- The effect would be on the company's overall net operating income if product H58S were dropped:- Overall net operating income would decrease by $135,000.

Explanation:-

Particulars	Amount
	$
Sales	980000
Less:- Variable expenses	394000
Contribution margin	586000
Less:- Fixed expenses (Avoidable)
Fixed manufacturing expenses	245000
Fixed selling and administrative expenses	206000
Segment Margin	135000

The segment margin of $135000 would be lost if product H58S were dropped and net operating income would decrease by $135000. Therefore, the product should not be dropped.