The management of Fannin Corporation is considering dropping product H58S. Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $90,000 of the fixed manufacturing expenses and $42,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the company's overall net operating income if product H58S were dropped?

Net operating income would be decreased by $137,000

Explanation:

The computation is shown below:

Sales                                          $490,000

Less: Variable expenses           ($221,000)

Contribution margin                  $269,000

Less

Fixed manufacturing expenses ($90,000)

Fixed selling and administrative expenses ($42,000)

Net income                                                      $137,000

If the product H58S were dropped than the net operating income would be decreased by $137,000

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