DM Corporation has provided you with the following budgeted income statement for one of their products:
$$\begin{array} { | l | r | }
\hline \text { Sales } & \$ 650,000 \
\hline \text { Variable Expenses } & 455,000 \
\hline \text { Contribution margin } & \$ 195,000 \
\hline \text { Fixed Expenses } & 240,000 \
\hline \text { Operating income } & ( \$ 45,000 ) \
\hline
\end{array}$$
DM Corporation believes that 70% of the fixed costs would be avoidable if the product line was dropped. Based on impact to the company operating income, DM should NOT drop the product line.

Question

DM Corporation has provided you with the following budgeted income statement for one of their products:
 $$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 650,000 \
\hline \text { Variable Expenses } & 455,000 \
\hline \text { Contribution margin } & \$ 195,000 \
\hline \text { Fixed Expenses } & 240,000 \
\hline \text { Operating income } & ( \$ 45,000 ) \
\hline
\end{array}$$ 
DM Corporation believes that 70% of the fixed costs would be avoidable if the product line was dropped. Based on impact to the company operating income, DM should NOT drop the product line.

Quizplus · Accepted Answer

Dropping the product line would save 70% of fixed costs, which is $168,000. The loss from dropping the line would be $195,000 (contribution margin) - $168,000 (avoidable fixed costs) = $27,000, which is less than the current loss of $45,000. Therefore, DM should not drop the product line.

DM Corporation Has Provided You with the Following Budgeted Income