The management of Union Co. is considering dropping product L57V. Data from the company’s accounting system appear below.
|
Sales |
$480,000 |
|
Variable Expenses |
$202,000 |
|
Fixed Manufacturing Expenses |
$158,000 |
|
Fixed Selling and Administrative Expenses |
$130,000 |
All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $86,000 of the fixed manufacturing expenses and $67,000 of the fixed selling and administrative expenses are avoidable if product L57V is discontinued.
Required:
i. What is the net operating income earned by product L57V according to the company’s accounting system? Show your work!
ii. What would be the effect on the company’s overall net operating income of dropping product L57V? Should the product be dropped? Show your work!