Dripolator is a coffee company that buys and roasts coffee beans. Currently, it

Question

Dripolator is a coffee company that buys and roasts coffee beans. Currently, it sells light roast, medium roast, and dark roast coffee. The income statement for December 31, 2014, showed the following:

Of the fixed costs, $9,000 is common costs allocated equally to each product line. What would be the effect on operating income if Dripolator eliminated light roast?

A  : It would decrease by $4,000.

B  : It would increase by $1,000.

C  : It would increase by $10,000.

D  : It would decrease by $1,500.

Explanation / Answer

Answer is option B it would increase by 1000

Common fixed cost of 3000 (9000/3) which would b incurred if any department is elimated

Net income after elimination = contribution margin of remaining two departments - fixed cost applicable to all departments after elimination of light rock

= 45000 - 29000 = 16000

Net income before elimination= 15000

Thus there is increase of 1000

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