Answer the following questions using the information below:
Rambo Company has three products, A, B, and C. The following information is available:

-Assuming Product C is discontinued and the space formerly used to produce Product C is rented for $12,000 per year, operating income will:
A)increase by $4,600
B)increase by $7,000
C)increase by $12,000
D)increase by $12,400

Question

Answer the following questions using the information below:
Rambo Company has three products, A, B, and C. The following information is available:
 
-Assuming Product C is discontinued and the space formerly used to produce Product C is rented for $12,000 per year, operating income will:
A)increase by $4,600 
B)increase by $7,000 
C)increase by $12,000 
D)increase by $12,400

Quizplus · Accepted Answer

The contribution margin of Product C is $7,000 ($28,000 - $21,000). Therefore, discontinuing Product C will reduce the revenue by $28,000 and reduce the variable costs by $21,000, resulting in a reduction in operating income of $7,000. However, the space formerly used to produce Product C is rented for $12,000, which will offset the reduction in operating income, resulting in a net increase of $5,000 ($12,000 - $7,000). Therefore, the correct answer is B, an increase in operating income by $7,000.

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