The Wright company reported the following results last year for the manufacture

Question

The Wright company reported the following results last year for the manufacture and sale of one of its best selling but least profitable products, the Mountain Bike.

Sales... (6,500 bikes at $130 each).... $845,000
variable cost of sales... $390,000
variable distribution costs.... $65,000
variable advertising expense... $275,000
salary of product line manager... $25,000
fixed manufacturing overhead... $145,000
Net loss.... ($55,000)

Wright Company is trying to determine whether of not to discontinue the manufacture and sale of the mountain bike. the operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the production of the bike shares with other products produced by Wright. If the bike is dropped, there would be no change in the fixed manufacturing costs of the company.

Assume that discontinuing the manufacture and sale of mountain bikes will have no effect on the dale of other product lines. If the company discontinues the product line, the change in annual operating income (or loss) should be:

A. $55,000 decrease
B. $65,000 decrease
C. $90,000 decrease
D. $70,000 increase

Explanation / Answer

C. $90,000 decrease

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