Question

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $90,000 of the fixed manufacturing expenses and $42,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the company's overall net operating income if product H58S were dropped?

Answer 1

Answer:

= $132,000.

Explanation:

There are two types of fixed costs, general fixed cost and specific fixed cost.

General fixed costs are those that cannot be traced to a specific product rather they are incurred for the benefit of all of the product being produced. For example,the rent of the factory where three products are being produced

So they are unavoidable should a product be ceased for production that is they would still be incurred either way.

Specific fixed costs are those incurred specifically for a particular product and as such they would be saved should the product be discontinued. For example , if a special machine  that cost $4000 a month to rent is used to produce a product. The $4000 would be saved should the production of the product ceases

The net operating cost of the company would increase by the amount of the avoidable specific fixed cost:

=$90,000 + $42,000

= $132,000.