Question

All About Farm Animals has two product lines: Horse feed and Cow feed. Contribution margin income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total Horse Feed $405,000 $320,000 $65,000 $25,000 $340,000 $295,000 $99,000 $47,000 $241,000 $248,000 Cow Feed $85,000 $40,000 $45,000 $52,000 $17,000) Assuming total fixed costs remain unchanged, how would discontinuing the Cow food line affect operating income? Decrease in total operating income of $437,000 Increase in total operating income of $196,000 Decrease in total operating income of $45,000 Increase in total operating income of $7,000

Answer 1

Ans.	Option 3rd
	Particulars	Horse Feed	Cow Feed	Total
	Sales revenue	320000	$0	320000
	Variable expenses	$25,000	$0	$25,000
	Contribution margin	$295,000	$0	$295,000
	Fixed expenses	$47,000	$52,000	$99,000
	Operating income	$248,000	-$52,000	$196,000
	*Change in operating income = Operating income after discontinuing the Cow feed line - Recent operating income
		$196,000 - $241,000
		-$45,000
	*Only fixed cost incurred after discontinuing the Cow feed line and it will decrease total operating income by $45,000.