Mission Company has three product lines: D, E, and F. The
following information is available:
D | E | F |
Sales revenue | $ | 84,000 | $45,000 | $ 20,000 |
Variable expenses | $ | 44,000 | $26,000 | $ 12,000 |
Contribution margin | $ | 40,000 | $19,000 | $ | 8,000 |
Fixed expenses | $ | 12,000 | $15,000 | $17,000 |
Operating income (loss) | $ | 28,000 | $4000 | $(9,000) |
Mission Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Mission Company discontinues product line F and rents the space formerly used to produce product F for $18,000 per year, what affect will this have on operating income?
Increase $27,000 |
||
Decrease $10,000 |
||
Increase $10,000 |
||
Increase $33,000 |
Answer- If product line F is discontinued and rents the space for $18000, then operating income will increase by $10000.
Explanation- Differential analysis in discontinue of Product F = Amount received from rent amount- Contribution lost due to discontinue of Product F
= $18000-$8000
= $10000
Hence if product F is discontinued the company operating income will increased by $10000. Fixed costs are totally unavoidable hence not relevant for decision making, they will continue to occur whether product are discontinue or not.
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