Shine Bright Company has three product lines: D, E & F. The following informatio

Question

Shine Bright Company has three product lines: D, E & F. The following information is available: D: Sales Revenue: $60,000, variable costs 36,000, contribution margin: 24,000, fixed expenses: 120,000, operating income: $12,000 E: Sales Revenue: $38,000, variable costs 18,000, contribution margin: 20,000, fixed expenses: 15,000, operating income: $5,000 F: Sales Revenue: $26,000, variable costs $12,000, contribution margin: 14,000, fixed expenses: 16,000, operating income (loss): $(2,000) Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. All fixed costs are unavoidable. Assuming Shine Bright Company drops line F and is able to double the production and sales of product line E without increasing fixed costs, what affect will this have on operating income? a) increase $6,000; b) increase $20,000; c) decrease $6,000; d) decrease $14,000

Explanation / Answer

Fixed expense will still remains same even after dropping product F. There will be no change in operating income of other 2 products. only change will occur because of dropping of unit F. Profit or Operating income now in space of product F = 17000-16000 = 1000 increase in operating income = 1000-(-2000) = 3000 (A) option is correct

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