Question - RAK Corporation is considering dropping product S85U. Data concerning S85U from the company's accounting system appear below:
Sales: $360000
Variable expenses: $158000
Fixed Manufacturing expenses $119000
Fixed selling & administrative expenses: $94000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $55,000 of the fixed manufacturing expenses and $71,000 of the fixed selling and administrative expenses are avoidable if product S85U is discontinued.
Required:
a. According to the company's accounting system, what is the net operating income earned by product S85U? Show your work!
b. What would be the effect on the company's overall net operating income of dropping product S85U? Should the product be dropped? Show your work!