Question
In: Accounting
7) Cesar Company has three product lines: A, B and C. The following annual information is...
7) Cesar Company has three product lines: A, B and C. The following annual information is available:
Product A Product B Product C
Sales $100,000 $90,000 $44,000
Variable costs 76,000 48,000 35,000
Contribution margin 24,000 42,000 9,000
Avoidable fixed costs 9,000 18,000 3,000
Unavoidable fixed costs 6,000 9,000 7,700
Operating income(loss) $9,000 $15,000 $(1,700)
Assume Cesar Company drops Product C. Cesar Company then doubles the production and sales of Product B without increasing fixed costs. What will happen to operating income?
A) increase by $15,000
B) increase by $24,000
C) increase by $36,000 please explain why this is the correct answer
D) increase by $42,000
Solutions
Expert Solution
| Product A | Product B | Product C | Total | |
| Sales | $ 1,00,000 | $ 90,000 | $ 44,000 | $ 2,34,000 |
| Less: Variable costs | $ 76,000 | $ 48,000 | $ 35,000 | $ 1,59,000 |
| Contribution margin | $ 24,000 | $ 42,000 | $ 9,000 | $ 75,000 |
| Avoidable fixed cost | $ 9,000 | $ 18,000 | $ 3,000 | $ 30,000 |
| Unavoidable fixed cost | $ 6,000 | $ 9,000 | $ 7,700 | $ 22,700 |
| Operating income | $ 9,000 | $ 15,000 | $ -1,700 | $ 22,300 |
| Product A | Product B | Product C | Total | |
| Sales | $ 1,00,000 | $ 1,80,000 | $ 2,80,000 | |
| Less: Variable costs | $ 76,000 | $ 96,000 | $ 1,72,000 | |
| Contribution margin | $ 24,000 | $ 84,000 | $ - | $ 1,08,000 |
| Avoidable fixed cost | $ 9,000 | $ 18,000 | $ 27,000 | |
| Unavoidable fixed cost | $ 6,000 | $ 9,000 | $ 7,700 | $ 22,700 |
| Operating income | $ 9,000 | $ 57,000 | $ -7,700 | $ 58,300 |
| Changes in net total income = $58300-22300 | ||||
| =$36000 (increase) | ||||
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