Contribution margin income statement data for the most recent year follow: Assuming the Dog food is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $25,000 per year, how will operating income be affected?

Question

Contribution margin income statement data for the most recent year follow:  Assuming the Dog food is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $25,000 per year, how will operating income be affected?

Quizplus · Accepted Answer

Discontinuing the Dog food line will result in a decrease in total revenue of $500,000, and a decrease in variable costs of $350,000. Therefore, the contribution margin will decrease by $150,000 ($500,000 - $350,000). 
Assuming that the total fixed costs remain unchanged at $1,180,000, the operating income for the year would be $170,000 ($320,000 - $150,000 - $1,180,000). 
However, renting the space formerly used to produce the Dog food line for $25,000 will increase the total fixed costs to $1,205,000. Therefore, the operating income will decrease by $20,000 ($170,000 - $25,000 - $1,205,000). 
The correct answer is therefore C (Decrease $20,000).

Contribution Margin Income Statement Data for the Most Recent Year