Diamond Company has three product lines, A, B, and C. The following financial in

Question

Diamond Company has three product lines, A, B, and C. The following financial information is available

Diamond is thinking of dropping Product Line C because it is reporting an operating loss. Assuming the company drops Product Line C and does not replace it, operating income for the firm will likely:

Be unchanged

Increase by $1,200

Increase by $1,500

Decrease by $1,500

Decrease by $2,700

Item Product Line A Product Line B Product Line C Sales $30,000 $45,000 $12,000 Variable costs $18,000 $24,000 $7,500 Contribution margin $12,000 $21,000 $4,500 Fixed costs:      Avoidable $4,500 $9,000 $3,000      Unavoidable $3,000 $4,500 $2,000 Operating income $4,500 $7,500 ($500)

Explanation / Answer

Ans: Operating income Decreased by $1500

if C continue Contribution =$4500

If C discontinue Cost benfit ie Avoidable cost is $3000

So if thinking of dropping Product Line C contribution margin will decrease by (4500-3000)=$1500

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