Claris Corporation (a multi-product company) produces and sells 7,000 units of Product X each year. Each unit of Product X sells for $12 and has a contribution margin of $4. If Product X is discontinued, $19,000 of the $32,000 in fixed costs charged to Product X could be eliminated. If Product X is discontinued, the company's overall operating income would:
A)decrease by $4,000 per year.
B)increase by $4,000 per year.
C)decrease by $9,000 per year.
D)increase by $9,000 per year.

Question

Quizplus · Accepted Answer

If Product X is discontinued, the company would lose the contribution margin of $4 per unit for 7,000 units, totaling $28,000. However, $19,000 of fixed costs would be eliminated. Therefore, the net effect on operating income would be a decrease of $9,000 ($28,000 - $19,000).

Claris Corporation (A Multi-Product Company) Produces and Sells 7,000 Units