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 $208,500 of the fixed manufacturing expenses and $119,500 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued. What would be the effect on the company\'s overall net operating income if product C11B were dropped? A) Overall net operating income would decrease by $190,500. B) Overall net operating income would increase by $66,500. C) Overall net operating income would decrease by $66,500. D)   Overall net operating income would increase by $190,500. Solution Contribution on product C11B = Sales - Variable cost = 925000-406500 = 518500 Total fixed cost = Fixed manufacturing cost + Fixed selling cost = 339000+246000 = 585000 Savings in fixed cost = Avoidable fixed manufacturing cost + Avoidable selling fixed cost = 208500+119500 = 328000 Non avoidable fixed cost = Total fixed cost - Avoidable fixed cost = 585000-328000 = 257000 Loss on product C11B = Contribution - Total fixed cost = 518500-585000 = (66500) Increase/Decrease in operating income = Non avoidable cost - Savings of loss =257000-66500 = 190500 A) Overall net operating income will decrease by 190500 .

1. 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 $208,500 of the fixed manufacturing expenses
and $119,500 of the fixed selling and administrative expenses are avoidable if product C11B is
discontinued.
What would be the effect on the company's overall net operating income if product C11B were
dropped?
A) Overall net operating income would decrease by $190,500.
B) Overall net operating income would increase by $66,500.
C) Overall net operating income would decrease by $66,500.
D)Â Â Overall net operating income would increase by $190,500.
Sales $925,000
Variable expenses $406,500
Fixed manufacturing expenses $339,000
Fixed selling and administrative expenses $246,000
Solution
Contribution on product C11B = Sales - Variable cost
= 925000-406500
= 518500
Total fixed cost = Fixed manufacturing cost + Fixed selling cost
= 339000+246000

2. = 585000
Savings in fixed cost = Avoidable fixed manufacturing cost + Avoidable selling fixed cost
= 208500+119500
= 328000
Non avoidable fixed cost = Total fixed cost - Avoidable fixed cost
= 585000-328000
= 257000
Loss on product C11B = Contribution - Total fixed cost
= 518500-585000
= (66500)
Increase/Decrease in operating income = Non avoidable cost - Savings of loss
=257000-66500
= 190500
A) Overall net operating income will decrease by 190500