6 Please put correct answer in the underlined space provided. ABC Company makes

Question

6 Please put correct answer in the underlined space provided. ABC Company makes and sells two products, X and Y, The income statement for last year was as follows: 10 Product X Product Y 12 13 14 15 16 Operating income 17 18 19 Variable cost Fixed Overhead Variable selling and administrative expenses Fixed selling and administrative expenses 152,000 168,000 80,000 56,000 35,920 16,800 40,000 (20,720) 48,000 40,000 12,800 11,200 The fixed costs are unavoidable and are allocated to products on the basis of sales revenue. When the president saw the income statement, he decided that the company should drop Product Y. If Product Y is dropped, the company's cost structure will remain the same and sales of Product X are expected to increase by 21 70% Required: 24 a) Compute the change in annual operating income if Product Y is 25 (7 Marks) discontinued and only Product X is sold. 28 29 31 32 34

Explanation / Answer

Current Annual Operating Income if Product Y is not Discontinued = Operating Income of X +

Operating Income of Y

Current Annual Operating Income if Product Y is not Discontinued = $40000 - $20720 = $19280

Operating Income if Product Y is discontinued = OPerating Income of X - Fixed OH allocated to Y - Fxied Selling Costs allocated to Y

Operating Income if Product Y is discontinued = $40000 - $56000 - $16800

Operating Income if Product Y is discontinued = $-32800

Change in Annual Operating Income = -32800 - $19280 = -$52080

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