Outdoors Inc. manufactures two products: Canoes and Kayaks. The results of operations for 2012 follow. $\begin{array}{l}
\begin{array}{lll}
\
\text { Units}\
\text { Sales}\
\text { Less: Cost of Goods Sold}\
\text { Gross Margin}\
\text { Less: Selling Expenses}\
\text { Operating Income}\
\end{array}
\begin{array}{lll}
\text { Canoes }\
12.000 \
\$ 288,000 \
\underline{216,000}\
72,000 \
\underline{72000}\
\underline{\$ 0}
\end{array}
\begin{array}{lll}
\text { Kayaks}\

4,000 \
\$ 800,000 \
\underline{516,000} \
284,000 \
\underline{159,000} \
\underline{\$ 125,000} \
\end{array}
\begin{array}{lll}
\text { Total }\
16,000\
\$ 1,080,000\
\underline{732,000}\
{348,000}\
\underline{231,000}\
\underline{\$ 125.000}
\end{array}
\end{array}$ Fixed manufacturing costs included in cost of goods sold amount to $2 per unit for Canoes and $19 per unit for Kayaks. Variable selling expenses are $5 per unit for Canoes and $21 per unit for Kayaks; remaining selling amounts are fixed. Outdoors Inc. wants to drop the Canoes product line. If the line is dropped, company-wide fixed manufacturing costs would fall by 10% because there is no alternative use of the facilities. What would be the impact on operating income if Canoes is discontinued?

Question

Outdoors Inc. manufactures two products: Canoes and Kayaks. The results of operations for 2012 follow. $\begin{array}{l}
\begin{array}{lll}
\
\text { Units}\
\text { Sales}\
\text { Less: Cost of Goods Sold}\
\text { Gross Margin}\
\text { Less: Selling Expenses}\
\text { Operating Income}\
\end{array}
\begin{array}{lll}
\text { Canoes }\
12.000 \
\$ 288,000 \
\underline{216,000}\
72,000 \
\underline{72000}\
\underline{\$ 0} 
\end{array}
\begin{array}{lll}
\text { Kayaks}\

4,000 \
\$ 800,000 \
\underline{516,000} \
 284,000 \
\underline{159,000} \
\underline{\$ 125,000} \
\end{array}
\begin{array}{lll}
\text { Total }\
16,000\
\$ 1,080,000\
\underline{732,000}\
{348,000}\
\underline{231,000}\
\underline{\$ 125.000}
\end{array}
\end{array}$ Fixed manufacturing costs included in cost of goods sold amount to $2 per unit for Canoes and $19 per unit for Kayaks. Variable selling expenses are $5 per unit for Canoes and $21 per unit for Kayaks; remaining selling amounts are fixed. Outdoors Inc. wants to drop the Canoes product line. If the line is dropped, company-wide fixed manufacturing costs would fall by 10% because there is no alternative use of the facilities. What would be the impact on operating income if Canoes is discontinued?

Quizplus · Accepted Answer

If Canoes are discontinued, the company would lose the $72,000 gross margin from Canoes, but save $24,000 in fixed manufacturing costs (10% of $240,000 total fixed costs). The net impact would be a $48,000 decrease in operating income. However, since the question asks for the impact on operating income, the correct choice is $26,000 decrease, as the $72,000 loss in gross margin is offset by the $24,000 savings in fixed costs.

Outdoors Inc Fixed Manufacturing Costs Included in Cost of Goods Sold Amount