Relevant Cost/Dropping a Product

The management of Woznick Corporation has been concerned for some time with the financial performance of its product V86O and has considered discontinuing it on several occasions. Data from the company’s accounting system appear below:

Sales …………………………………………….$250,000

Variable expenses……………………………..$102,000

Fixed manufacturing expenses ……………………$80,000

Fixed selling and administrative expenses ……$45,000

In the company’s accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $45,000 of the fixed manufacturing expenses and $25,000 of the fixed selling and administrative expenses are avoidable if product V86O is discontinued.

A. According to the company’s accounting system, what is the net operating income earned by product V86O?

B. What would be the effect on the company’s overall net operating income if product V86O were dropped?

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