Question

HiTech manufactures two products: Regular and Super. The results of operations for 20x1 follow.

	Regular		Super				Total
Units	10,000			3,700		13,700
Sales	$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	$           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.

    41.   HiTech 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?

            A.   $0.

            B.   $10,400 increase.

            C.   $20,000 increase.

            D.   $39,600 decrease.

            E.   None of the above.

Answer 1

Regular   

Revenue		-240,000
variable cost of goods sold	180,000 - (3*10,000)	150,000
variable selling expense	4*10,000	40,000
total fixed cost	(10,000*3)+(3,700*20)*10%	10,400
profit/ loss		-39,600
Answer is D		39,600 decrease

Here lost contribution margin from Regular is greater than avoidable fixed cost may result in a not drop decision but if the company drop irrespective of the loss occurs from droping the regular section it may result in a decrese of 39,600 from discontinuing it.