JF Cola is currently considering whether to discontinue production of its diet d

ID: 2549519 • Letter: J

Question

JF Cola is currently considering whether to discontinue production of its diet drink. The diet drink product had the following product loss last year: Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Operating Loss $260,000 (160,000) 100,000 (120,000) $(20,000) 25% of the cost of goods sold represents fixed manufacturing overhead costs and 30% of the operating expenses are fixed. Only $60,000 of the fixed costs will be eliminated if the diet line is discontinued. What will happen to the company's operating income if the diet line is discontinued? O A. The company's operating income will increase. O B. The company's operating income will decrease By how much will the company's operating income change if the diet line is discontinued? (enter an absolute dollar amount) Income $

Explanation / Answer

Total Fixed costs=25% of Cost of goods sold + 30% operating fixed costs

=25%*160,000 + 30%*120,000

=$76,000

Particulars

Amount(in $)

(1)

Total fixed costs(as calculated above)

$76,000

(2)

Less;-Eliminated fixed costs

$60,000

(3)

Uneliminated fixed costs(76000-60000)

$16,000

(4)

Loss due to operating diet drink

$(20,000)

(5)

Net increase/(Decrease) in operating Income of company(20000-16000)

$4000

(1).B.The company's operating income will increase

(2).The company's operating income will increase by $4,000.

operating income is increased by 4000,operating loss is currently 20000 and unavoidable cost is only 16000,so, the loss would decrease by that amount, that is 4000, so, there is increase in the operating income by that amount, that is 4000.