Question

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

Regular Super Total

Units 10,000 4,100 14,100

Sales revenue $ 250,000 $ 943,000 $ 1,193,000

Less: Cost of goods sold 200,000 574,000 774,000

Gross Margin $ 50,000 $ 369,000 $ 419,000

Less: Selling expenses 50,000 226,000 276,000

Operating income (loss) $ 0 $ 143,000 $ 143,000

Fixed manufacturing costs included in cost of goods sold amount to $2 per unit for Regular and $20 per unit for Super. Variable selling expenses are $3 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed.

Omar Industries wants to drop the Regular product line. If the line is dropped, company-wide fixed manufacturing costs would fall by 20% because there is no alternative use of the facilities. What would be the impact on operating income if Regular is discontinued?

Answer 1

Omar Industries:
Particulars	Regular	Super	Total	Note
Units	10,000.00	4,100.00		A
Fixed cost of goods sold per unit	2.00	20.00		B
Fixed cost of goods sold	20,000.00	82,000.00	102,000.00	C=A*B
Total cost of goods sold	200,000.00	574,000.00	774,000.00	D
Variable cost of goods sold	180,000.00	492,000.00	672,000.00	E=D-C
Variable selling expenses per unit	3.00	20.00		F
Variable selling expenses	30,000.00	82,000.00	112,000.00	G=A*F
Total selling expenses	50,000.00	226,000.00	276,000.00	H
Fixed selling expenses	20,000.00	144,000.00	164,000.00	I=H-G
Contribution margin income statement	Regular	Super	Total
Sales	250,000.00	943,000.00	1,193,000.00
Less: Variable costs
Costs of goods sold	180,000.00	492,000.00	672,000.00	See E
Selling and admin expense	30,000.00	82,000.00	112,000.00	See G
Contribution margin	40,000.00	369,000.00	409,000.00	J
If Regular product line dropped:	Amount $	Note
Savings in overall fixed manufacturing costs by 20%	20,400.00	K=C*20%
Less: Contribution loss of regular	40,000.00	See J
Incremental net loss	19,600.00
Omar Industries will loss $ 19,600 so Regular should not be dropped.