The management of Kabanuck Corporation is considering dropping product V41B.Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system.Further investigation has revealed that $184, 000 of the fixed manufacturing expenses and $200, 000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued. According to the company's accounting system, what is the net operating income earned by product V41B? Include all costs in this calculation-whether relevant or not.
A)$71, 000
B)$516, 000
C)$(516, 000)
D)$(71, 000)

Question

The management of Kabanuck Corporation is considering dropping product V41B.Data from the company's accounting system appear below:  All fixed expenses of the company are fully allocated to products in the company's accounting system.Further investigation has revealed that $184, 000 of the fixed manufacturing expenses and $200, 000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued. According to the company's accounting system, what is the net operating income earned by product V41B? Include all costs in this calculation-whether relevant or not.
A)$71, 000 
B)$516, 000 
C)$(516, 000) 
D)$(71, 000)

Quizplus · Accepted Answer

To calculate the net operating income earned by product V41B, we need to consider all the costs allocated to it in the accounting system. From the given data, we know that all fixed expenses are fully allocated to products.

Therefore, the operating income for product V41B is:

Sales revenue = $780,000
Variable expenses = $400,000
Contribution margin = $380,000
Fixed manufacturing expenses = $350,000
Fixed selling and administrative expenses = $320,000

Total costs = $1,050,000
Operating income = $780,000 - $1,050,000 = $(270,000)

This means that product V41B is currently generating a loss of $(270,000). However, if the company discontinues this product, it can avoid $184,000 of fixed manufacturing expenses and $200,000 of fixed selling and administrative expenses.

This would result in an increase in net operating income by $184,000 + $200,000 = $384,000. Therefore, the net operating income earned by product V41B if it is discontinued would be:

Operating income = $(270,000) + $384,000 = $114,000

Since we are asked to calculate the net operating income earned by product V41B, we need to consider the negative sign and the answer should be D)$(71,000) instead of $71,000.

The Management of Kabanuck Corporation Is Considering Dropping Product V41B