A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would:

A) decrease by $20,000 per year.
B) increase by $30,000 per year.
C) decrease by $10,000 per year.
D) increase by $20,000 per year.

Question

Wajiha Feroz · Accepted Answer

Final Answer : C, Explanation :  If Product A is dropped, the company will lose its contribution margin of $60,000 ($200,000 sales - $140,000 variable expenses). However, it will save $50,000 in fixed expenses ($90,000 total fixed expenses - $40,000 continuing fixed expenses). Therefore, the net effect on the company's overall net operating income would be a decrease of $10,000 per year ($60,000 lost contribution margin - $50,000 saved fixed expenses).

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