Astudy has been conducted to determine if product a should be dropped. sales of the product total $400,000 per year; variable expenses total $270,000 per year. fixed expenses charged to the product total $160,000 per year. the company estimates that $70,000 of these fixed expenses are not avoidable even if the product is dropped. if product a is dropped, the company's overall net operating income would:
a. decrease by $40,000 per yearb. increase by $40,000 per yearc. decrease by $30,000 per yeard. increase by $30,000 per year

Option (A) is correct.

Explanation:

Contribution Margin:

= Total sales of the product - variable expenses

= $400,000 - $270,000

= $130,000

Avoidable fixed cost = Total fixed cost - Unavoidable fixed cost

                                  = $160,000 - $ 70,000

                                  = $90,000

Net Margin :  

= Contribution Margin - Avoidable fixed expense

= $130,000 - $90,000

= $40,000

Hence, if product A is dropped, the company's overall net operating income would decrease by $40,000 per year.

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