Question

Naylor Corporation produces multiple products. Financial information for Product A is included below.

	Product A
Revenue	$        190,000
Variable expenses	45,000
Contribution margin	145,000
Traceable fixed costs	70,000
Allocated common fixed costs	80,000
Net operating income	$          (5,000)

Based on this information, Product A should be discontinued.

True

False

Answer 1

answer is FALSE.

Explaination (1) : We cannot take net operating income into consideration while making decisions like that because the net operating income is calculated by deducting fixed cost (which is constant irrespective of volume of production) from the contribution.

Explaination (2): A product with positive contribution is worth keeping eventhough the product's conventional net operating income is negative as the product covers all the variable cost that incured due to its manufacturing.