Macaulay Company has three product lines-D, E, and F. The following information is available: Macaulay Company is thinking of dropping product line F because it is reporting an operating loss. Assuming fixed costs are unavoidable, if Macaulay Company drops product line F and does not replace it, what effect will this have on operating income?

Question

Macaulay Company has three product lines-D, E, and F. The following information is available:  Macaulay Company is thinking of dropping product line F because it is reporting an operating loss. Assuming fixed costs are unavoidable, if Macaulay Company drops product line F and does not replace it, what effect will this have on operating income?

Quizplus · Accepted Answer

Dropping product line F will result in the loss of its contribution margin, which is $20,000. Since the company is currently reporting an operating loss for product line F, dropping it will result in a reduction of this loss. However, the fixed costs associated with product line F will still need to be covered by the remaining product lines. Therefore, the overall effect on operating income will be a decrease of $20,000.

Macaulay Company Has Three Product Lines-D, E, and F