HiTech manufactures two products: Regular and Super. The results of operations for 20x1 follow. Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed.
HiTech wants to drop the Regular 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 Regular is discontinued?
A) $0.
B) $10,400 increase.
C) $20,000 increase.
D) $39,600 decrease.
E) None of the other answers are correct.

Question

HiTech manufactures two products: Regular and Super. The results of operations for 20x1 follow.  Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed.
HiTech wants to drop the Regular 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 Regular is discontinued?
A) $0. 
B) $10,400 increase. 
C) $20,000 increase. 
D) $39,600 decrease. 
E) None of the other answers are correct.

Quizplus · Accepted Answer

To determine the impact on operating income, we need to compare the current operating income of both products with the operating income if Regular is discontinued.

Current operating income for both products:

Regular:

Revenue: $80 x 10,000 = $800,000
Cost of goods sold: ($50 + $3) x 10,000 = $530,000
Variable selling expenses: $4 x 10,000 = $40,000
Fixed selling and administrative expenses: $180,000

Operating income: $50,000

Super:

Revenue: $200 x 10,000 = $2,000,000
Cost of goods sold: ($120 + $20) x 10,000 = $1,400,000
Variable selling expenses: $20 x 10,000 = $200,000
Fixed selling and administrative expenses: $320,000

Operating income: $60,000

Total operating income for both products: $110,000

If Regular is discontinued:

Super:

Revenue: $200 x 10,000 = $2,000,000
Cost of goods sold: ($120 + $20) x 10,000 = $1,400,000
Variable selling expenses: $20 x 10,000 = $200,000
Fixed selling and administrative expenses: $320,000

Operating income: $60,000

Total operating income: $60,000

Dropping Regular would result in a decrease of 45% in revenue ($800,000 ÷ ($800,000 + $2,000,000)) but only a decrease of 49% in cost of goods sold ($530,000 ÷ ($530,000 + $1,400,000)). This is because Fixed manufacturing costs included in cost of goods sold would fall by 10% only.

Total fixed costs would decrease by 19% ($180,000 + $320,000) x 10%, or $70,400.

Total operating income for both products after dropping Regular:

Super:

Revenue: $200 x 10,000 = $2,000,000
Cost of goods sold: ($120 + $20) x 10,000 = $1,400,000
Variable selling expenses: $20 x 10,000 = $200,000
Fixed selling and administrative expenses: $320,000

Operating income: $60,000

Total operating income: $60,000 - $50,400 = $9,600

The difference between current operating income and operating income after dropping Regular is a decrease of $100,400.

Therefore, the answer is D: $39,600 decrease.

HiTech Manufactures Two Products: Regular and Super