Jim Bean Company has three product lines: D, E, and F. The following information is available: D E F
Sales revenue $ 80,000 $42,000 $20,000
Variable expenses $ 40,000 $21,000 $12,000
Contribution margin $ 40,000 $21,000 $ 8,000
Fixed expenses $ 12,000 $15,000 $17,000
Operating income (loss)$ 28,000 $46,000 $(9,000)
Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Jim Bean Company discontinues product line F and rents the space formerly used to produce product F for $20,000 per year, what affect will this have on operating income?

Question

Quizplus · Accepted Answer

By discontinuing product line F, the company will save fixed expenses of $17,000, which will increase operating income by $8,000 (contribution margin of F). In addition, by renting out the space, the company will receive an additional $20,000 in revenue, which will increase operating income by a total of $28,000. Therefore, the operating income will increase by $12,000 (Option B).

Jim Bean Company Has Three Product Lines: D, E, and F