Question

Central Industries has three product lines: A, B and C. The following information is available: Product A Product B Product C Sales $100,000 $90,000 $44,000 Variable costs 76,000 48,000 35,000 Contribution margin 24,000 42,000 9,000 Avoidable fixed costs 9,000 18,000 3,000 Unavoidable fixed costs 6,000 9,000 7,700 Operating income(loss) $9,000 $15,000 $(1,700) Central Industries is thinking about dropping Product C because it is reporting a loss. Assume Central Industries drops Product C and does not replace it. What will happen to operating income

Answer 1

Answer:

Operating Income will decrease by $6,000.

Explanation:

The unavoidable Fixed Cost of Product C will continue to incur even if it is dropped. So, Central Industries will still have to Incur $7,700 of Fixed Cost but by dropping Product C, they can save the existing loss of $1,700. This means that:

1,700 - 7,700 = -$6,000.

Thanks!

Answer 2

Answer:

It will decrease by 6,000 which is the operating contribtuion generated for the product before allocation of common fixed cost.

Explanation:

We have to build the segment income statement

$\left[\begin{array}{ccccc}&A&B&C&Total\\ Sales&100000&90000&44000&234000\\ Variable Cost&-76000&-48000&-35000&-159000\\ Contribution&24000&42000&9000&75000\\ Tracable fixed&-9000&-18000&-3000&-30000\\ Operating Income&15000&24000&6000&45000\\ Fixed Cost&&&&-22700\\ Net Income&&&&22300\\\end{array}\right]$

As the Product is generating a positive contribution for 6,000 it would be a financial disadvantage to discontinued. It is making a "loss" because of the common fixed cost allocated to the product not, the product.