The most recent income statement for the Parma Branch of the Dinero Company is presented below. $$\begin{array} { l r }
\text { Sales } & \$ 57,000 \
\text { Variable costs } & \underline { 31,500 } \
\text { Contribution margin } & \$ 25,500 \
\text { Fixed costs: } & \
\text { Avoidable } & 13,500 \
\quad \text { Unavoidable } & \underline { 18,000 } \
\text { Operating income } & \underline { \$ 6,000 } )
\end{array}$$ If the Parma Branch is eliminated and the space is rented for $24,000, operating income will be _____.
A)increased by $24,000
B)decreased by $30,000
C)increased by $12,000
D)decreased by $12,000

Question

The most recent income statement for the Parma Branch of the Dinero Company is presented below. $$\begin{array} { l r } 
\text { Sales } & \$ 57,000 \
\text { Variable costs } & \underline { 31,500 } \
\text { Contribution margin } & \$ 25,500 \
\text { Fixed costs: } & \
\text { Avoidable } & 13,500 \
\quad \text { Unavoidable } & \underline { 18,000 } \
\text { Operating income } & \underline { \$ 6,000 } )
\end{array}$$ If the Parma Branch is eliminated and the space is rented for $24,000, operating income will be _____.
A)increased by $24,000
B)decreased by $30,000
C)increased by $12,000
D)decreased by $12,000

Quizplus · Accepted Answer

Eliminating the Parma Branch removes the $25,500 contribution margin but also removes the $13,500 avoidable fixed costs. The net decrease in income is $12,000 ($25,500 - $13,500). Renting the space for $24,000 increases income by $24,000. Therefore, the net effect is an increase in operating income of $12,000 ($24,000 - $12,000).

The Most Recent Income Statement for the Parma Branch of the Dinero