DM Corporation has provided you with the following budgeted income statement for one of their products: 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 be the impact on operating income of the company?

Question

DM Corporation has provided you with the following budgeted income statement for one of their products:  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 be the impact on operating income of the company?

Quizplus · Accepted Answer

To calculate the impact on operating income, we need to subtract the total expenses from the total revenue.

Currently, the operating income is $180,000 ($720,000 - $540,000), as shown in the budgeted income statement.

If DM can eliminate 75% of the fixed expenses due to dropping the product line, the new total expenses will be $420,000 ($1,680,000 x 75%).

The new operating income will be $300,000 ($720,000 - $420,000).

The difference between the current and new operating income is -$120,000 ($180,000 - $300,000).

Therefore, the operating income will decrease by $45,000 ($120,000 x 0.375).

DM Corporation Has Provided You with the Following Budgeted Income