Homework SourseNaylor Corporation produces multiple products Financial info
Naylor Corporation produces multiple products. Financial information for Product A is included below.
Product A
Revenue
$ 190,000
Variable expenses
45,000
Contribution margin
145,000
Traceable fixed costs
70,000
Allocated common fixed costs
80,000
Net operating income
$ (5,000)
Based on this information, Product A should be discontinued.
True
False
| Product A | |
| Revenue | $ 190,000 |
| Variable expenses | 45,000 |
| Contribution margin | 145,000 |
| Traceable fixed costs | 70,000 |
| Allocated common fixed costs | 80,000 |
| Net operating income | $ (5,000) |
Solution
answer is FALSE.
Explaination (1) : We cannot take net operating income into consideration while making decisions like that because the net operating income is calculated by deducting fixed cost (which is constant irrespective of volume of production) from the contribution.
Explaination (2): A product with positive contribution is worth keeping eventhough the product\'s conventional net operating income is negative as the product covers all the variable cost that incured due to its manufacturing.
