Question

The managers of Courtney Cabinets are considering dropping one of their product lines. The product line typically has the following revenue and costs: Sales $120,000 Variable costs 90,000 Contribution margin 30,000 Fixed costs 35,000 Operating loss $ (5,000) If the product line is discontinued, $4,000 of the fixed costs would be avoided. Also, the freed-up capacity would generate $6,000 of additional contribution margin from the expansion of other product lines. If Courtney discontinues the product line, the effect on overall income will be A. $20,000 decrease B. $9,000 increase C. $10,000 decrease D. $12,000 decrease

Answer 1

Correct answer is: A. $20,000 decrease
Workings:
	Continued Product line	Discontinued Product line	Net Change
Sales revenue	$           1,20,000	$                                   -	$ -1,20,000
Variable costs	$               90,000	$                                   -	$     -90,000
Contribution margin	$               30,000	$                            6,000	$     -24,000
Fixed costs	$               35,000	$                          31,000	$        -4,000
Operaing Income	$                -5,000	$                        -25,000	$     -20,000