Sorensen Enterprises has provided the following monthly income statement:
|
Total |
Product A |
Product B |
Prodict C |
| Sales |
$100,000 |
$50,000 |
$20,000 |
$30,000 |
| Variable expenses |
60,000 |
30,000 |
10,000 |
20,000 |
| Contribution margin |
40,000 |
20,000 |
10,000 |
10,000 |
| Fixed expenses: |
|
|
|
|
| Facilities cost |
9,000 |
4,500 |
1,500 |
3,000 |
| Depreciation |
6,000 |
3,000 |
1,200 |
1,800 |
| Supervisors' salaries |
5,000 |
1,500 |
500 |
3,000 |
| Maintenance |
3,000 |
1,500 |
600 |
900 |
| Administrative expense |
10,000 |
3,000 |
2,000 |
5,000 |
| Total fixed expenses |
33,000 |
13,500 |
5,800 |
13,700 |
| Net operating income |
7,000 |
6,500 |
4,200 |
(3,700) |
The owners are considering dropping Product C. The following additional information is available:
- If Product C is dropped, sales volume of Product B is expected to drop by 10%.
- The $3,000 facilities cost for Product C represents the cost of a seperate facility used to manufacture the product.
- The company's total depreciation would not change if Product C was dropped.
- If Product C were dropped, it would be possible to cut one of administrative staff employees. Their salary totals $2,000 per month.
- If Product C were dropped, total maintenance costs are expected to drop by $1,000 per month.
Question is: By how much would the net operating income of Sorensen increase or decrease if they drop Product C?