Macaulay Company has three product lines-D, E, and F. The following information is available: $\begin{array}{|l|c|c|c|}
\hline& \text { D } & \text { E } & \text { F } \
\hline \text { Sales } & \$ 70,000 & \$ 40,000 & \$ 30,000 \\hline \text { Variable costs } & (40,000) & (20,000) & (10,000) \
\hline \text { Contribution margin } & 30,000 & 20,000 & 20,000 \\hline \text { Fixed expenses } & (15,000) & (15,000) & (25,000) \
\hline \text { Operating income (loss) } & \$ 15,000 & \$ 5,000 & (\$ 5,000) \
\hline
\end{array}$ Macaulay Company is thinking of dropping product line F because it is reporting an operating loss.
- Assuming fixed costs are unavoidable, if Macaulay Company drops product line F and does not replace it, what effect will this have on operating income?

Question

Macaulay Company has three product lines-D, E, and F. The following information is available: $\begin{array}{|l|c|c|c|} 
\hline& \text { D } & \text { E } & \text { F } \
\hline \text { Sales } & \$ 70,000 & \$ 40,000 & \$ 30,000 \\hline \text { Variable costs } & (40,000) & (20,000) & (10,000) \
\hline \text { Contribution margin } & 30,000 & 20,000 & 20,000 \\hline \text { Fixed expenses } & (15,000) & (15,000) & (25,000) \
\hline \text { Operating income (loss) } & \$ 15,000 & \$ 5,000 & (\$ 5,000) \
\hline
\end{array}$ Macaulay Company is thinking of dropping product line F because it is reporting an operating loss.
- Assuming fixed costs are unavoidable, if Macaulay Company drops product line F and does not replace it, what effect will this have on operating income?

Quizplus · Accepted Answer

Dropping product line F will eliminate its contribution margin of $20,000, but the fixed expenses of $25,000 will remain, resulting in a decrease in operating income by $20,000.

Macaulay Company Has Three Product Lines-D, E, and F Macaulay Company Is Thinking of Dropping Product Line F Because