Question

Omar Industries manufactures two products: Regular and Super. The results of operations for 20x1 follow. Regular Super Total Units 10,000 3,700 13,700 Sales revenue $ 240,000 $ 740,000 $ 980,000 Less: Cost of goods sold 180,000 481,000 661,000 Gross Margin $ 60,000 $ 259,000 $ 319,000 Less: Selling expenses 60,000 134,000 194,000 Operating income (loss) $ 0 $ 125,000 $ 125,000 Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed. Omar Industries wants to drop the Regular product line. If the line is dropped, company-wide fixed manufacturing costs would fall by 10% because there is no alternative use of the facilities. What would be the impact on operating income if Regular is discontinued

Answer 1

Answer:

Omar Industries

If Regular product line is dropped, the operating income will be reduced by $31,600 to $93,400.

Explanation:

a) Data and Calculations:

                                            Regular           Super             Total

Units                                      10,000           3,700           13,700

Sales revenue                $ 240,000   $ 740,000    $ 980,000

Less: Cost of goods sold   180,000       481,000        661,000

Gross Margin                   $ 60,000   $ 259,000    $ 319,000

Less: Selling expenses      60,000        134,000       194,000

Operating income (loss)           $ 0    $ 125,000    $ 125,000

Fixed manufacturing costs  $3 per unit  $20 per unit

Variable selling expenses    $4 per unit  $20 per unit

Variable manufacturing      150,000     407,000      557,000

Variable selling expenses   40,000        74,000        114,000

Total variable costs            190,000      481,000       671,000

Fixed manufacturing costs 30,000        74,000        104,000

Fixed selling expenses      20,000        60,000         80,000

Total fixed costs                 50,000       134,000       184,000

Income Statement, using contribution margin approach:

                                            Regular           Super             Total

Units                                      10,000           3,700           13,700

Sales revenue                $ 240,000   $ 740,000    $ 980,000

Variable costs                    190,000       481,000         671,000

Contribution margin           50,000      259,000        309,000

Fixed costs                          50,000       134,000         184,000

Operating income/(loss)     $0            $125,000      $125,000

Elimination of Regular:

                                           Super      

Units                                      3,700  

Sales revenue                $ 740,000

Variable costs                    481,000

Contribution margin         259,000

Fixed costs                        165,600

Operating income/(loss)  $93,400