HiTech manufactures two products: Regular and Super. The results of operations f
ID: 2479117 • Letter: H
Question
HiTech manufactures two products: Regular and Super. The results of operations for 20x1 follow.
Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed.
HiTech wants to drop the Regular product line. If the line is dropped, company-wide fixed manufacturing costs would fall by 10% because there is no alternative use of the facilities. Total fixed cost for both products is $184,000. What would be the impact on operating income if Regular is discontinued?
A. $0.
B. $10,400 increase.
C. $20,000 increase.
D. $31,600 decrease.
E. $39,600 decrease.
Explanation / Answer
cost goods sold-Fixed:
Regular=$3*10,000=$30,000
Super=$20*3,700=$74,000
Total company Manufacturing Fixed cost=$30,000+$74,000=$104,000
Fixed selling cost:
for regular=Total cost -Variable cost=$60,000-$4*10,000=$20,000
Super=$134,000-3,700*$20=$134,000-$74,000=$60,000
Total Fixed selling cost=$20,000+$60,000=$80,000
Decrease in manufacturing cost=$104,000*10%=$10,400
Total fixed cost in regular=$30,000+$20,000=$50,000
Net income decrease if regular discontinues=-$50,000+$10,400=-$39,600
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