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Managerial Accounting

Bayshore Company manufactures and sells Product K. Results for last year are as follows:

Sales (10,000 units at 150 each) 1,500,000
Less expenses:
Variable production costs 900,000
Sales commissions (15% of sales) 225,000
Salary of product line manager 190,000
Traceable fixed advertising expense 175,000
Fixed manufacturing overhead 160,000
Total expenses 1,650,000
Net operating loss (150,000)

Bayshore is reexamining all of its product lines and is trying to decide whether to discontinue Product K. Dropping the product would have no effect on the total fixed manufacturing overhead incurred by the company.
Reference: 13-2

Assume that dropping Product K will have no effect on the sale of other product lines. If the company drops Product K, the change in annual net operating income due to this decision will be a:

310,000 decrease
10,000 decrease
160,000 decrease
150,000 increase

Solution Summary

Solution contains calculations of effect on net income if company drops one product.