San Bernardino Industries has three product lines, A, B and C. The following inf

Question

San Bernardino Industries has three product lines, A, B and C. The following information is available:

                       A                     B                       C

Sales                            $100,000         $90,000           $88,000

Variable costs              - 76,000           - 48,000           - 79,000

Contribution margin $24,000           $42,000           $9,000

Fixed costs:

Direct                          - 9,000            - 18,000           - 11,000

Common                     - 6,000             - 9,000             - 4,400

Operating Income      $9,000             $15,000           $(6,400)

If product line C is discontinued and the space formerly used to manufacture product C is rented for $15,000, operating income will increase by:

Explanation / Answer

If product line C is discontinued , then loss will be reduced by ( 9000 - direct FC 11000 ) $ 2000

Add:- $ 15000 ( space formerly used to manufacture product C is rented for $15,000 )

SO, operating income will increase by $ 17000

Option D is correct.

Common FC are irrelevant.

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