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20 February, 00:02

Sales $920,000 Variable expenses $388,000 Fixed manufacturing expenses $370,000 Fixed selling and administrative expenses $250,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $233,000 of the fixed manufacturing expenses and $194,000 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?

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  1. 20 February, 01:06
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    The company would have a greater net operating income of $339,000 if the product H58S were dropped.

    Explanation:

    The net operating income can be expressed as;

    a). If product H58S is not dropped

    Net operating income=income from sales-Total expenses

    where;

    Income from sales=$920,000

    Total expenses=Net fixed expenses+variable expenses

    Fixed expenses=Fixed manufacturing expenses+Fixed selling and administrative expenses = (370,000+250,000) = $620,000

    Variable expenses=$388,000

    Total expenses = (620,000+388,000)

    Total expenses=$1,008,000

    Net operating income = (920,000-1,008,000) = -$88,000

    b). If product H58S is dropped

    Income from sales=$920,000

    Total expenses=Net fixed expenses+variable expenses

    Fixed expenses=Fixed manufacturing expenses+Fixed selling and administrative expenses = (370,000+250,000) = $620,000

    Net fixed expenses = (620,000) - (233,000+194,000)

    Net fixed expenses=$193,000

    Variable expenses=$388,000

    Total expenses=193,000+388,000 = $581,000

    Replacing;

    Net operating income = (920,000-581,000)

    Net operating income=$339,000

    The company would have a greater net operating income of $339,000 if the product H58S were dropped.
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