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Homework answers / question archive / HiTech manufactures two products: Regular and Super
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 |
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|
Less: Cost of goods sold |
180,000 |
481,000 |
661,000 |
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|
Gross margin |
$ 60,000 |
$259,000 |
$319,000 |
|||||
|
Less: Selling expenses |
60,000 |
134,000 |
194,000 |
|||||
|
Operating income |
$ 0 |
$125,000 |
$125,000 |
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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.
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.
