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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