HiTek manufactures two products, Regular and Super. The results of last year’s o

Question

HiTek manufactures two products, Regular and Super. The results of last year’s operations are below. Regular Super Total Units 10,000 3,700 13,700 Sales $240,000 $740,000 $980,000 Less: cost of goods sold 180,000 481,000 661,000 Gross margin $ 60,000 $259,000 $319,000 Less: selling expenses 60,000 134,000 194,000 Operating income $ 0 $125,000 $125,000 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

Regular Super Total Units            10,000              3,700            13,700 Sales        2,40,000        7,40,000        9,80,000 Less:- Cost of Goods Sold        1,80,000        4,81,000        6,61,000 Gross Margin            60,000        2,59,000        3,19,000 Less:- Selling Exp            60,000        1,34,000        1,94,000 Operating Income                     -          1,25,000        1,25,000 Cost per Unit Regular Super Sales                    24                  200 Less:- Cost of Goods Sold                    18                  130 Gross Margin                       6                    70 Less:- Selling Exp                       6                    36 Operating Income                     -                      34 Fixed Mfg Cost per unit 3 20 Total Fixed Mfg Cost            30,000            74,000        1,04,000 Fixed Selling Cost per unit 2 16 Total Fixed Selling Cost            20,000            59,200            79,200 Income Statement if , Regular is Discontinue/Drop Super Sales        7,40,000 Less:- Cost of Goods Sold Variable (130-20)*3700        4,07,000 Fixed Cost            93,600 (90% of $104000) Gross Margin        2,39,400 Less:- Selling Exp            74,000 Variable (36-16)*3700 Fixed Selling Exp            79,200 Operating Income            86,200 After discontinue the Regular, Income will come down by $ 125000-$86200 = $ 38800. Therefore it is suggested , not to discountiue the regular.

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