Alta Loma Industries has three product lines, A, B, and C. The following information is available: $$\begin{array} { l l l l }
& \underline { \mathrm { A } } & \underline { \mathrm { B } } & \underline { \mathrm { C } } \
\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 36,000 \
\text { Variable costs } & 76,000 & 48,000 & 27,000 \
\text { Contribution } & \$ 24,000 & \$ 42,000 & \$ 9,000\\text { margin }\\text { Fixed costs: }\
\text { Avoidable } & 9,000 & 18,000 & 3,000 \
\text { Unavoidable } & 6,000 & 9,000 & 8,400\
\text { Operating income }&\$9,000&\$15,000&\$2,400
\end{array}$$ Assume that product line C is discontinued and replaced with product line B. This will double the production and sales of product line B without increasing fixed costs. Operating income will:

Question

Alta Loma Industries has three product lines, A, B, and C. The following information is available: $$\begin{array} { l l l l } 
& \underline { \mathrm { A } } & \underline { \mathrm { B } } & \underline { \mathrm { C } } \
\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 36,000 \
\text { Variable costs } & 76,000 & 48,000 & 27,000 \
\text { Contribution } & \$ 24,000 & \$ 42,000 & \$ 9,000\\text { margin }\\text { Fixed costs: }\
\text { Avoidable } & 9,000 & 18,000 & 3,000 \
\text { Unavoidable } & 6,000 & 9,000 & 8,400\
\text { Operating income }&\$9,000&\$15,000&\$2,400
\end{array}$$ Assume that product line C is discontinued and replaced with product line B. This will double the production and sales of product line B without increasing fixed costs. Operating income will:

Quizplus · Accepted Answer

If product line C is discontinued and replaced with product line B, the sales of product line B will double to $180,000. The variable costs will also double to $96,000, resulting in a contribution margin of $84,000. The fixed costs will remain the same, so the operating income will increase by $42,000 ($84,000 - $42,000).

Alta Loma Industries Has Three Product Lines, A, B, and C