DM Corporation has provided you with the following budgeted income statement for

Question

DM Corporation has provided you with the following budgeted income statement for one of its products: Sales revenue Variable costs Contribution margin Fixed costs Operating loss $700,000 (430,000) $270,000 (310,000) $(40,000) DM has just encountered environmental problems with the product and will be forced to drop the product line altogether. DM will be able to eliminate 60% of the fixed costs. What will be the impact on operating income of the company? Select one: A. Operating income will increase by $186,000. B. Operating income will decrease by $186,000 C. Operating income will increase by $84,000. D. Operating income will decrease by $84,000.

Explanation / Answer

D) Operating income will decrease by $84,000.

Fixed cost savings($310,000 × 60%) $186,000 Contribution margin lost ($270,000) Operating income decrease $84,000

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