Question

DM Corporation has provided you with the follwing budgeted income statement for one of its products:

Sales $700,000
Variable Expenses ($430,000)
Contribution Margin $270,000
Fixed Expenses ($310,000)
Operating Loss ($40,000)
DM has encountered environmental problems with the product and will be forced to drop the product alltogether. They will be able to eliminate 60% of the fixed expenses. What will be the impact on the operating income for the company?
a) operating income decreases by $84,000
b) increases by $84,000
c) increase by $186,000
d) decrease by $186,000

Answer 1

A) operating income decreases by $84,000

Step-by-step explanation:

Sales $700,000 ⇒ ELIMINATED, SINCE THE PRODUCTS WILL NOT BE SOLD ANYMORE

Variable Expenses ($430,000) ⇒ ELIMINATED, SINCE THE PRODUCTS WILL NOT BE SOLD ANYMORE

Fixed Expenses ($310,000) ⇒ REDUCED BY 60% TO ($124,000)

Operating Loss ($40,000) ⇒ INCOME WILL DECREASE IN TOTAL BY $124,000

Since the total decrease income will be $124,000, that represents = $124,000 (unavoidable fixed costs) - $40,000 (current loss) = $84,000 in additional losses