Question

Allen's Fine Jewelry makes necklaces, bracelets and rings. In the past two years, they have failed to make a profit with their necklace line. The following information relates to the costs involved in making the necklaces: • Revenue: $125 per necklace • Direct Labor: 4 hours, @ $30/hour • Variable Overhead: $20 per necklace • Fixed Overhead: $75 per necklace • Average number of pieces sold per month: 65 necklaces Management is considering discontinuing the necklace segment of their business. By how much would Operating Income per month increase or decrease if this segment were dropped? Select one: O a. $975 decrease in operating income O b. $975 increase in operating income O C. $325 decrease in operating income O d. $325 increase in operating income

Answer 1

Answer: b. $975 increasing in operting income Workings: Sales revenue (65 necklaces * $125 per necklace) Less: Direct labor [65 necklaces * (4 hours * $30 per hour)] Variable overhead (65 necklaces * $20 per necklace) $8,125 $7,800 $1,300 -$975 If management is considering discontinuing the nacklace segment of their business. Hence operating income per month increase if necklaces segment were dropped. Fixed cost is not consider for above calculation because it is a sunk cost.