Question

Castillo Corporation has provided you with the following budgeted income statement for one of its​ products:

Sales revenue $ 700,000
Variable costs ​(430,000​)
Contribution margin $ 270,000
Fixed costs ​(310,000​)
Operating loss ​$(40,000​)

Castillo has just encountered environmental problems with the product and will be forced to drop the product line altogether. Castillo will be able to eliminate 60​% of the fixed costs. What will be the impact on operating income of the​ company

Answer 1

The operating income of the company will fall down to $(186,000).

Step-by-step explanation:

Currently, the company has a operating income of $(40,000). This is the result of the equation sales minus variable costs minus fixed costs. In numbers:
`700,000 - 430,000 - 310,000 = (40,000)`.

If Castillo Corporation will eliminate all the product line together, the sales will drop to zero. The variable costs wil be zero too. But from the $310,000 of fixed costs, will remain the 40% (186,000). If we use the same equation, the result is
`0 - 0 - 186,000 = 186,000`.