Benace Parts and Supply makes a variety of car parts. The company produces 6100 A90 parts each year. Each A90 sells for $7 and has a contribution margin of $4. Currently, $16,400 of fixed manufacturing overhead is allocated to the A90 product line. If Benace Parts and Supply discontinues the A90 product line, $7300 of fixed manufacturing overhead costs would be avoided. What would be the impact on total operating income if the A90 product line were to be discontinued?

Question

Quizplus · Accepted Answer

The contribution margin per unit is $4, which means that if the company discontinues the A90 product line, they would lose $4 of contribution margin per unit.

The total contribution margin for the A90 product line is: 
6100 units x $4 contribution margin per unit = $24,400

If the company discontinues the A90 product line, they would avoid $7300 of fixed manufacturing overhead costs. However, they would also lose the contribution margin of $24,400.

Therefore, the impact on total operating income would be: 
Operating Income = (Sales - Variable Costs) - Fixed Costs

If the A90 product line is discontinued: 
Operating Income = $0 - $0 - $16,400 - $7,300 = -$23,700

If the A90 product line is not discontinued: 
Operating Income = ($7 x 6100) - ($3 x 6100) - $16,400 = $9,400

The difference between the two scenarios is: 
-$23,700 - $9,400 = -$33,100

Therefore, if the A90 product line were to be discontinued, there would be a decrease in total operating income of $33,100.

Benace Parts and Supply Makes a Variety of Car Parts