The management of Austin Corporation is considering dropping product R97C. 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 $34,000 of the fixed manufacturing expenses and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is discontinued. What would be the effect on the company's overall net operating income if product R97C were dropped?

Question

The management of Austin Corporation is considering dropping product R97C. 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 $34,000 of the fixed manufacturing expenses and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is discontinued. What would be the effect on the company's overall net operating income if product R97C were dropped?

BlackTom AI · Accepted Answer

Contribution margin = Sales − Variable expenses, because only variable costs disappear with the product; fixed costs matter only if they are avoidable.

1) Key concepts:
- Contribution margin (CM) = sales − variable expenses; losing a product eliminates its CM.
- Only avoidable (traceable) fixed costs are saved when a product is dropped; unavoidable fixed costs remain and do not affect the drop decision.
- Net operating income change = lost CM − fixed cost savings (avoidable fixed costs).

2) Step-by-step reasoning and calculations:
- Sales = $130,000
- Variable expenses = $56,000
  → Contribution margin = $130,000 − $56,000 = $74,000
- Fixed manufacturing expenses allocated to the product = $49,000, but only $34,000 is avoidable.
- Fixed selling & administrative expenses allocated = $35,000, but only $20,000 is avoidable.
  → Total avoidable fixed costs = $34,000 + $20,000 = $54,000

3) Compute effect on net operating income:
- If product R97C is dropped, the company loses the contribution margin: −$74,000.
- The company saves the avoidable fixed costs: +$54,000.
- Net change = −$74,000 + $54,000 = −$20,000.

4) Why the correct answer is correct:
The product generates a positive contribution of $74,000 toward covering fixed costs. Only $54,000 of the product’s fixed costs would actually disappear if the product were discontinued. Thus discontinuing the product reduces overall net operating income by the difference, $20,000.

5) Why the other options are incorrect:
- Decrease by $54,000: This treats the entire avoidable fixed costs as the net effect and ignores the lost contribution margin.
- Increase by $20,000: Wrong sign; discontinuing loses more contribution than fixed-cost savings, so income falls, not rises.
- No change: Incorrect because the lost contribution margin ($74,000) does not equal the avoidable fixed savings ($54,000).

Conclusion: Net operating income would decrease by $20,000 if product R97C were dropped, which matches the provided correct answer.

类似问题

PA 9. A. What is the per-unit cost for each Shapes under the traditional allocation method?

Which is the correct formula for computing the overhead rate?

PA 12 - The journal entry to record this transaction would include... E. Indirect labor incurred $ 50

EA 7 - What was the predetermined overhead rate using machine hours?

EA 9 - What was the balance in work in process?

The activity base for service industries is most likely to be ________.

A job order costing system is most likely used by which of the following?

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单