7) Jim Bean Company has three product lines: D, E, and F. The following informat

Question

7) Jim Bean Company has three product lines: D, E, and F. The following information is available: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) $ 80,000 $42,000 $ 40,000 40,000 S-12,000 $20,000 $ 8,000 $(9,000) $21,000 515 $ 28,000 $6,000 Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss, All fvsed costs are unavoidable. Assuming Jim Bean Company discontinues line Fand is able to double the production and sales of product line E without increasing fixed costs. What affect will this have on operating income?

Explanation / Answer

Operating income ( with all products ) = 28000 + 6000 - 9000 = 25000

Operating income ( with D and E products ) = 28000 ( no change) + 27000 (i.e 6000 + 21000 additional contribution due to doubling of sales of E) - 17000 unabsorbed fixed costs = 28000 + 27000 - 17000 = 38000

So operating income shall increase by 13000.................final answer

OR.................. SHORT CUT

If Product - F is droped all things remain same except

(1) There is loss of contribution of 8000 ................... product - F

(2) There is a gain of contribution of 21000 .............. product - E

Net effect .............. 21000 - 8000 = 13000 ...............final answer

Plz comment which of the above two methods helped you to understand ........ the impact of droping of a product line.

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