DM Corporation has provided you with the following budgeted income statement for one of their products:
$\begin{array}{|l|l|}
\hline \text { Sales } & \$ 650,000 \
\hline \text { Variable expenses } & 455,000 \
\hline \text { Contribution margin } & \$ 195,000 \
\hline \text { Fixed expenses } & 240,000 \
\hline \text { Operating income } & (\$ 45,000) \
\hline
\end{array}$

DM has just encountered environmental problems with the product and will be forced to drop the product line altogether. They will be able to eliminate 75% of the fixed expenses. What will the impact on operating income be?

Question

DM Corporation has provided you with the following budgeted income statement for one of their products:
$\begin{array}{|l|l|}
\hline \text { Sales } & \$ 650,000 \
\hline \text { Variable expenses } & 455,000 \
\hline \text { Contribution margin } & \$ 195,000 \
\hline \text { Fixed expenses } & 240,000 \
\hline \text { Operating income } & (\$ 45,000) \
\hline
\end{array}$

DM has just encountered environmental problems with the product and will be forced to drop the product line altogether. They will be able to eliminate 75% of the fixed expenses. What will the impact on operating income be?

Quizplus · Accepted Answer

If the product line is dropped, the contribution margin of $195,000 will be lost, but 75% of the fixed expenses ($240,000 * 0.75 = $180,000) will be eliminated. The net impact on operating income will be a decrease of $15,000 ($195,000 - $180,000).

DM Corporation Has Provided You with the Following Budgeted Income