Question

State Road Fabricators Inc. is considering eliminating Model A02777 because of losses over the past quarter. The past three months of information for Model A02777 are summarized below: $390,000 Sales (1,400 units) Manufacturing costs: Direct materials Direct labor ($15 per hour) Overhead Operating loss 180,000 110,000 120,000 ($20,000) Overhead costs are 65% variable and the remaining 35% is depreciation of special equipment for model A02777 that has no resale value. If Model A02777 is dropped from the product line, operating income will __ O A. increase by $20,000 O B. increase by $42,000 O C. decrease by $22,000 OD. decrease by $20,000

Answer 1

Company's operating income will decrease by $22,000. The explanation is given below.

Present scenario, Amount 3 90000 Inflow Loss : sales (in $) 3 90000 (A) sales (1400 units) W variable cost : Direct material Direct labour Overhead - (1200X65% (18000) (10) (78000) Contribution 22000 Qutflow avoided : Direct Material 18000 Direct labour tw Variable Overhead 7 800 - saving: (B) 368000 Net loss = $22000 ($390000 - 36800$) - Pixed cost: Depreciation (1200x358) (42000) Operating loss (2000) Depreciation will continue cost and the machine has won't be sold out. to occur as it is fixed. no resale value. So, it Y the company income will drops model A02777 , then decrease by $22000 - operating