The management of Fries Corporation has been concerned for some time with the financial performance of its product R89H and has considered discontinuing it on several occasions. Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $31,000 of the fixed manufacturing expenses and $46,000 of the fixed selling and administrative expenses are avoidable if product R89H is discontinued.
-What would be the effect on the company's overall net operating income if product R89H were dropped?
A)Overall net operating income would decrease by $66,000.
B)Overall net operating income would decrease by $8,000.
C)Overall net operating income would increase by $66,000.
D)Overall net operating income would increase by $8,000.

Question

The management of Fries Corporation has been concerned for some time with the financial performance of its product R89H and has considered discontinuing it on several occasions. Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $31,000 of the fixed manufacturing expenses and $46,000 of the fixed selling and administrative expenses are avoidable if product R89H is discontinued.
-What would be the effect on the company's overall net operating income if product R89H were dropped?
A)Overall net operating income would decrease by $66,000. 
B)Overall net operating income would decrease by $8,000. 
C)Overall net operating income would increase by $66,000. 
D)Overall net operating income would increase by $8,000.

Quizplus · Accepted Answer

If product R89H were dropped, the company would lose the contribution margin that product R89H provides, which is $66,000. Therefore, the overall net operating income would decrease by this amount.

The Management of Fries Corporation Has Been Concerned for Some