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Effect on the Overall Net Operating Income

1. The management of Heider Corporation is considering dropping product J14V. Data from the company's accounting system appear below:

Sales $900,000
Variable expenses $384,000
Fixed manufacturing expenses $366,000
Fixed selling and administrative expenses $246,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $225,000 of the fixed manufacturing expenses and $186,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued. What would be the effect on the company's overall net operating income if product J14V were dropped?

2. Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to product $230,000 wheels annually are as follows:

Direct material $46,000
Direct labor $69,000
Variable manufacturing overhead $34,500
Fixed manufacturing overhead $73,000
Total $222,500

An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $28,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to another company for $70,900 per year.
If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is ___________?

3. Wright Company produces products I, J and K from a single raw material input. Budgeted data for the next month follows:
Product I Product J Product K
Units Produced 2,100 2,600 3,600
Per unit sales value at split-off $19 $25 $21
Added processing costs per unit $2 $4 $4
Per unit sales value if processed further $26 $26 $31

If the cost of raw material input is $74,000, which of the products should be processed beyond the split-off point?
Product I Product J Product K
A) yes yes no
B) yes no yes
C) no yes no
D) no yes yes

4. A customer has requested the Inga Corporation fill a special order for 2,700 units of product K81 for $32 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $22.00:

Direct materials $6.30
Direct labor 4.00
Variable manufacturing overhead 3.40
Fixed manufacturing overhead 8.30
Unit product cost $22.00

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product K81 that would increase the variable costs by $1.90 per unit and that would require an investment of $17,00 in special molds that would have no salvage value.
This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase by: _______________?

Solution Summary

The solution discusses the effect on the overall net operating income.