Question

Benace Parts and Supply makes a variety of car parts. The company produces A90 parts each year. Each A90 sells for and has a contribution margin of . ​Currently, of fixed manufacturing overhead is allocated to the A90 product line. If Benace Parts and Supply discontinues the A90 product​ line, of fixed manufacturing overhead costs would be avoided. What would be the impact on total operating income if the A90 product line were to be​ discontinued?

Answer 1

The total Operating income will decrease by $5,000

Step-by-step explanation:

Note that some word are missing and are inserted as written below:

"Benace Parts and Supply makes a variety of car parts. The company produces 6,000 A90 parts each year. Each A90 sells for $7 and has a contribution margin of $2. Currently, $16,000 of fixed manufacturing overhead is allocated to the A90 product line. If Benace Parts and Supply discontinues the A90 product line, $7,000 of fixed manufacturing overhead costs would be avoided. What would be the impact on total operating income if the A90 product line were to be discontinued? "

Solution:

Loss of Contribution margin if the A90 product line discontinued = Units * Contribution margin per unit

= 6,000 units * $2

= $12,000

Saving of avoidable fixed Overhead = $7,000

Decrease in Total Operating Income = Loss of Contribution margin - Saving of avoidable fixed Overhead

= $12,000 - $7.000

= $5,000 (Decrease)

Hence, the total Operating income will decrease by $5,000