Greenview Corp. (see PB7-1 and PB7-2) is considering eliminating a product from its line of outdoor tables. Two products, the Sunrise and Noche tables, have impressive sales. However, sales for the Blanco model have been dismal.
Information related to Greenview's outdoor table line is as follows.
Greenview has determined that eliminating the Blanco model will cause sales of the Sunrise and Noche tables to increase by 10 percent and 5 percent, respectively. Variable costs for these two models will increase proportionately. Direct fixed costs are avoidable, but common fixed costs will remain unchanged.
Required:
Will Greenviews's net operating income increase or decrease if the Blanco model is eliminated? By how much? Should Greenview drop the Blanco model?
Suppose Greenview had $3,800 of direct fixed overhead that was traceable to the Blanco model. Would your recommendation to Greenview change? Why or why not?