The management of Austin Corporation is considering dropping product R97C. 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 $34,000 of the fixed manufacturing expenses and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is discontinued. What would be the effect on the company's overall net operating income if product R97C were dropped?
A) Overall net operating income would increase by $20,000.
B) Overall net operating income would increase by $10,000.
C) Overall net operating income would decrease by $20,000.
D) Overall net operating income would decrease by $10,000.

Question

The management of Austin Corporation is considering dropping product R97C. 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 $34,000 of the fixed manufacturing expenses and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is discontinued. What would be the effect on the company's overall net operating income if product R97C were dropped?
A) Overall net operating income would increase by $20,000. 
B) Overall net operating income would increase by $10,000. 
C) Overall net operating income would decrease by $20,000. 
D) Overall net operating income would decrease by $10,000.

Quizplus · Accepted Answer

The contribution margin of Product R97C is $12, which is less than the avoidable fixed expenses ($34,000 + $20,000 = $54,000). Therefore, dropping Product R97C would decrease the company's overall net operating income by $20,000.

The Management of Austin Corporation Is Considering Dropping Product R97C