Question

Diamond Company has three product lines, A, B, and C. The following financial information is available:

Item Product Line A Product Line B Product Line C
Sales $70,000 $145,000 $32,000
Variable costs $42,000 $77,000 $20,000
Contribution margin $28,000 $68,000 $12,000
Fixed costs:
Avoidable $6,300 $19,000 $8,950
Unavoidable $5,000 $14,500 $4,000
Pre-tax operating
income $16,700 $34,500 $(-950 )

Assuming that Product Line C is discontinued and the manufacturing space formerly devoted to this line is rented for $6,000 per year, operating income for the company will likely:

a. Increase by $7,200.
b. Increase by $3,300.
c. Increase by some other amount.

Answer 1

,Answer:

See below

Step-by-step explanation:

A B C

Sales revenue

$70,000 $145,000 $32,000

Variable costs

($42,000) ($77,000) ($20,000)

Contribution margin

$28,000 $68,000 $12,000

Fixed costs

Operating income loss

The total operating income is

= $16,700 + $34,500 + ($950)

= $50,250

Should the fixed cost of C be eliminated, the operating income/(loss) of C

= $6,000 - $950

= $5,050

This is the net increase in the total operating income