Giant Company has three products, A, B, and C. The following information is available:

Giant Company is thinking of dropping Product C because it is reporting a loss. Assuming Giant drops Product C and does NOT replace it, operating income will ________.
A) increase by $3,400
B) increase by $2,000
C) decrease by $6,000
D) decrease by $11,400

Question

Giant Company has three products, A, B, and C. The following information is available:

Giant Company is thinking of dropping Product C because it is reporting a loss. Assuming Giant drops Product C and does NOT replace it, operating income will ________.
A) increase by $3,400 
B) increase by $2,000 
C) decrease by $6,000 
D) decrease by $11,400

Quizplus · Accepted Answer

Dropping Product C would mean Giant gives up $8,000 in contribution margin while only saving $2,000 in avoidable fixed costs. Without Product C, operating income would be $6,000 less than currently reported.

Giant Company Has Three Products, A, B, and C