HiTek manufactures two products, Regular and Super. The results of last year\'s

Question

HiTek manufactures two products, Regular and Super. The results of last year's operations are below. Fixed manufacturing costs included in cost of goods sold are $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. The remaining selling amounts are fixed. HiTek believes it should drop the Regular product line. If HiTek drops Regular, company-wide fixed manufacturing costs would fall by 10% because there is no alternative use of the facilities. What would be the INCREASE or DECREASE in net operating income if Regular is discontinued? Fixed selling expenses of the Regular division represent allocated costs which would not be avoided if the division was dropped. Your answer must state both the DOLLAR AMOUNT of the CHANGE in income, and also whether it is an INCREASE or a DECREASE.

Explanation / Answer

$39,600 decrease

Revenues -2,40,000 Variable COGS (180,000 – 3*(10,000)) 150000 Variable selling expenses (4*10,000) 40000 Total fixed costs (3*10,000 + 20*3700)*10% 10400 Profit -39,600

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