State Road Fabricators Inc. is considering eliminating Model A02777 because of losses over the past quarter. The past three months of information for Model A02777 are summarized below:

Overhead costs are 75% variable and the remaining 25% is depreciation of special equipment for model A02777 that has no resale value.
If Model A02777 is dropped from the product line, operating income will ________.
A) increase by $80,000
B) decrease by $117,500
C) increase by $37,500
D) decrease by $80,000

Question

State Road Fabricators Inc. is considering eliminating Model A02777 because of losses over the past quarter. The past three months of information for Model A02777 are summarized below:

Overhead costs are 75% variable and the remaining 25% is depreciation of special equipment for model A02777 that has no resale value.
If Model A02777 is dropped from the product line, operating income will ________.
A) increase by $80,000 
B) decrease by $117,500 
C) increase by $37,500 
D) decrease by $80,000

Quizplus · Accepted Answer

$470,000 - $160,000 - $80,000 - $112,500 = $117,500 This product contributes $117,500 toward corporate profits, therefore, discontinuing this product will decrease operating income by $117,500.