Question

Oneco Industries manufactures two products: Works and Best. The results of operations for 20x1 follow.

	Works				Best				Total
Units		15,000				4,000				19,000
Sales revenue	$	420,000			$	760,000			$	1,180,000
Less: Cost of goods sold		330,000				420,000				750,000
Gross Margin	$	90,000			$	340,000			$	430,000
Less: Selling expenses		90,000				210,000				300,000
Operating income (loss)	$	0			$	130,000			$	130,000

Fixed manufacturing costs included in cost of goods sold amount to $2 per unit for Works and $30 per unit for Best. Variable selling expenses are $3 per unit for Works and $30 per unit for Best; remaining selling amounts are fixed.

Oneco Industries wants to drop the Works 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 Works is discontinued?

Multiple Choice

• $45,000 increase.

• $45,000 decrease.

• $30,000 increase.

• $0.

• None of the answers is correct.

Answer 1

Correct answer---------$45,000 decrease.

Working

	Works	Best	Total
Units		4000	4000
Sales revenue		$ 760,000.00	$      760,000.00
Less: Cost of goods sold-Variable		$ 300,000.00	$      300,000.00
Less: Selling expenses-Variable		$ 120,000.00	$      120,000.00
Contribution margin	$                   -	$ 340,000.00	$      340,000.00
Less: Selling expenses-Fixed	$    45,000.00	$    90,000.00	$      135,000.00
Less: Cost of goods sold-Fixed	$    24,000.00	$    96,000.00	$      120,000.00
Net Operating income	$ (69,000.00)	$ 154,000.00	$        85,000.00

.

Income before discontinuing Work	$ 130,000.00
Income after discontinuing Work	$    85,000.00
Net decrease in income	$    45,000.00

It is assumed that fixed selling expense will continue to occur