The management of Heider Corporation is considering dropping product J14V.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 $211,000 of the fixed manufacturing expenses and $172,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued.What would be the effect on the company's overall net operating income if product J14V were dropped?
A)Overall net operating income would decrease by $55,000.
B)Overall net operating income would increase by $160,000.
C)Overall net operating income would increase by $55,000.
D)Overall net operating income would decrease by $160,000.

Question

The management of Heider Corporation is considering dropping product J14V.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 $211,000 of the fixed manufacturing expenses and $172,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued.What would be the effect on the company's overall net operating income if product J14V were dropped?
A)Overall net operating income would decrease by $55,000. 
B)Overall net operating income would increase by $160,000. 
C)Overall net operating income would increase by $55,000. 
D)Overall net operating income would decrease by $160,000.

Quizplus · Accepted Answer

If product J14V is dropped, the company's overall net operating income will decrease by $160,000. This is because the company can avoid $211,000 of fixed manufacturing expenses and $172,000 of fixed selling and administrative expenses by discontinuing the product. However, the company will also lose the $101,000 contribution margin from the product, resulting in a decrease in net operating income of $160,000 ($211,000 + $172,000 - $101,000 = $160,000).

The Management of Heider Corporation Is Considering Dropping Product J14V