The Management of Zorrilla Corporation Is Considering Dropping Product R10C

question 110

Multiple Choice

The management of Zorrilla Corporation is considering dropping product R10C. Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $42,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product R10C is discontinued.
-What would be the effect on the company's overall net operating income if product R10C were dropped?

• A) Overall net operating income would decrease by $28,000.
• B) Overall net operating income would decrease by $45,000.
• C) Overall net operating income would increase by $28,000.
• D) Overall net operating income would increase by $45,000.

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Definitions:

Times Interest Earned

A financial ratio that measures the ability of a business to meet its interest payments based on current earnings.

Interest Expense

The cost incurred by a company for borrowed funds, including loans, bonds, and lines of credit.

Times Interest Earned Ratio

A metric to assess a company's ability to meet its debt obligations, calculated as earnings before interest and taxes divided by interest expense.

Times Interest Earned

A financial ratio measuring a company's ability to meet its interest obligations from operating earnings, calculated as income before interest and taxes divided by interest expense.