Product R19N has been considered a drag on profits at Buzzeo Corporation for some time and management is considering discontinuing the product altogether. Data from the company's accounting system appear below:
Sales 270,000
Variable expenses 132,000
Fixed manufacturing expenses 95,000
Fixed selling and administrative expenses 65,000
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $49,000 of the fixed manufacturing expenses and $30,000 of the fixed selling and administrative expenses are avoidable if product R19N is discontinued. What would be the effect on the company's overall net operating income if product R19N were dropped?
Answer:
Decrease in net operating income $(59
,000)
Explanation:
The effect of discontinuing the product would be determined by considering the following cash flows:
$
Lost contribution from the product
(270,000 -132,000) (138
,000)
Savings in fixed cost
(49,000 + 30,000) <u> 79,000</u>
Decrease in net operating income <u> (59
,000)</u>
If product R19N is discontinued , the company's overall net operating income would be reduced by $59,000
