Question

Diamond is thinking of dropping Product Line C because it is reporting an operating loss. Assuming the company drops Product Line C and does not replace it, pre-tax operating income for the firm will likely:

Answer 1

Assuming the company drops Product Line C and does not replace it, pre-tax operating income for the firm will likely:

• decrease by $1,500

Step-by-step explanation:

Since no information was provided, I looked for a similar question:

Item Product Line A Product Line B Product Line C

Sales $30,000 $45,000 $12,000

Variable costs $18,000 $24,000 $7,500

Contribution margin $12,000 $21,000 $4,500

Fixed costs:

Avoidable $4,500 $9,000 $3,000

Unavoidable $3,000 $4,500 $2,000

Operating income $4,500 $7,500 ($500)

total unavoidable fixed costs = $2,000 which will be allocated to product lines A and B

the financial disadvantage of dropping product C = $2,000 (unavoidable costs) - $500 (operating loss) = $1,500

D