Question

1.Omar Industries manufactures two products: Regular and Super. The results of operations for 20x1 follow.

	Regular				Super				Total
Units		15,000				3,000				18,000
Sales revenue	$	300,000			$	660,000			$	960,000
Less: Cost of goods sold		228,000				360,000				588,000
Gross Margin	$	72,000			$	300,000			$	372,000
Less: Selling expenses		72,000				140,000				212,000
Operating income (loss)	$	0			$	160,000			$	160,000

Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed.

If Omar Industries eliminates Regular and uses the available capacity to produce and sell an additional 1,300 units of Super, what would be the impact on operating income?

Multiple Choice:

• $73,000 increase
• $58,000 increase
• $99,000 increase
• $55,000 increase
• None of the answers is correct.

2.Howard Enterprises, which has three departments, recently reported the following results:

		A				B				C
Sales revenue	$	18,000			$	69,000				63,000
Less: Operating costs		17,000				86,100				79,500
Operating income (loss)	$	1,000			$	(17,100	)		$	(16,500	)

The company incurred variable operating costs as well as $38,000 of fixed operating costs. The $38,000 amount was allocated to A, B, and C on the basis of sales revenue and is included in the cost figures noted above. Which department(s), if any, should be closed if none of the fixed operating costs can be avoided?

Multiple Choice:

• None of the departments should be closed.
• Department B.
• Department C.
• Department A.
• Departments B and C.

Answer 1

Q.1	Correct Option A i.e. $73,000 increase
	Note 1: Prepare contribution format income statement
		Regular	Super	Total
	Units	15,000	3,000	18,000
	Sales revenue	300,000	660,000	960,000
	Less: variable Cost of goods sold	183,000	300,000	483,000
	Less: Variable Selling expenses	60,000	60,000	120,000
	Contribution Margin	57,000	300,000	357,000
	Less: Fixed Cost of goods sold	45,000	60,000	105,000
	Less: Fixed Selling expenses	12,000	80,000	92,000
	Operating income (loss)	-	160,000	160,000
	Impact on income if regular eliminated
	Loss of Contribution margin of regular	(57,000)
	Add: Extra contribution margin on 1300 units of Super	130,000	(300000/3000*1300)
	Increase in Net Inocme	73,000
Q.2	Correct Option C i.e. Department C. should be closed due to negative contribution margin.
	Note 1: Prepare contribution format income statement
		A	B	C	Total
	Sales revenue	18,000	69,000	63,000	150,000
	Less: Variable operating cost	12,440	68,620	63,540	144,600
	Contribution margin	5,560	380	(540)	5,400
	Less: Fixed operating cost	4,560	17,480	15,960	38,000
	Operating income (loss)	1,000	(17,100)	(16,500)	(32,600)