The management of Freshwater Corporation is considering dropping product C11B. 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 $211,000 of the fixed manufacturing expenses and $122,000 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued.
-According to the company's accounting system,what is the net operating income earned by product C11B?
A)$74,000
B)$(521,000)
C)$(74,000)
D)$521,000

Question

The management of Freshwater Corporation is considering dropping product C11B. 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 $211,000 of the fixed manufacturing expenses and $122,000 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued.
-According to the company's accounting system,what is the net operating income earned by product C11B?
A)$74,000 
B)$(521,000) 
C)$(74,000) 
D)$521,000

Quizplus · Accepted Answer

The net operating income earned by product C11B can be calculated as follows:
Sales revenue = $400,000
Variable expenses = $186,000 + $110,000 = $296,000
Contribution margin = Sales revenue - Variable expenses = $400,000 - $296,000 = $104,000
Fixed expenses directly attributable to the product = $178,000
Net operating income = Contribution margin - Fixed expenses = $104,000 - $178,000 = $(74,000) (negative means loss). Therefore, the correct answer is option C.

The Management of Freshwater Corporation Is Considering Dropping Product C11B