Cesar Company has three product lines: A,B and C.The following annual information is available:
$\begin{array}{llll}&\text { Product A }&\text { Product B }&\text { Product C }\
\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 44,000 \
\text { Variable costs } & \underline{76,000} & \underline{48,000} & \underline{35,000}\
\text { Contribution margin } & 24,000 & 42,000 & 9,000 \
\text { Avoidable fixed costs } & 9,000 & 18,000 & 3,000 \
\text { Unavoidable fixed costs } & 6,000 & 9,000 & 7,700\
\text { Operating income(loss) }&\$9,000&\$15,000&\$(1,700)
\end{array}$
Assume Cesar Company drops Product C.Cesar Company then doubles the production and sales of Product B without increasing fixed costs.What will happen to operating income?
A) increase by $15,000
B) increase by $24,000
C) increase by $36,000
D) increase by $42,000

Question

Quizplus · Accepted Answer

Doubling the production and sales of Product B without increasing fixed costs would add another $15,000 (current operating income from B) + $9,000 (avoidable fixed costs saved from dropping Product C) to the operating income, totaling an increase of $24,000. However, the contribution margin of Product B ($42,000) would also double, adding an additional $42,000 to the income. The total increase would be $24,000 (from doubling B's sales and dropping C) + $42,000 (additional contribution from doubling B's sales) - $30,000 (original contribution and avoidable fixed costs of C) = $36,000.

Cesar Company Has Three Product Lines: A,B and C Assume Cesar Company Drops Product C