The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows: If fixed costs remain unchanged and Germain Appliances discontinues the Microwave line, how will operating income change?
A)Will decrease by $160,000
B)Will increase by $45,000
C)Will decrease by $45,000
D)Will increase by $160,000

Question

The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows:  If fixed costs remain unchanged and Germain Appliances discontinues the Microwave line, how will operating income change?
A)Will decrease by $160,000 
B)Will increase by $45,000 
C)Will decrease by $45,000 
D)Will increase by $160,000

Quizplus · Accepted Answer

Looking at the income statement, the operating income of the Microwaves line is $45,000. If Germain Appliances discontinues the Microwaves line, they will save $45,000 in variable costs associated with that line. However, this savings will be offset by the loss of revenue from the Microwaves line, which is $120,000. Therefore, the operating income will decrease by $45,000.

The Income Statement for Germain Appliances Is Divided by Its