The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows: If Germain Appliances can eliminate fixed costs of $32,000 and increase the sale of Toasters by 6,000 units at a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the Microwaves should result in which of the following?

Question

The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows:  If Germain Appliances can eliminate fixed costs of $32,000 and increase the sale of Toasters by 6,000 units at a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the Microwaves should result in which of the following?

Quizplus · Accepted Answer

If Germain Appliances discontinues the Microwaves product line and increases the sale of Toasters by 6,000 units, the new contribution margin from Toasters would be:

Contribution margin per unit = $8
Increase in unit sales = 6,000
New contribution margin from Toasters = $8 x 6,000 = $48,000

However, the fixed costs of $32,000 are eliminated, so the new operating income would be:

New operating income = $48,000 - $0 - $28,000 = $20,000

Therefore, discontinuing the Microwaves product line would result in an increase in total operating income of $20,000 - $15,000 = $35,000. Therefore, the answer is choice (A).

The Income Statement for Germain Appliances Is Divided by Its