All About Animals has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow: If $13,000 of fixed costs will be eliminated by discontinuing the Dog food line, how will operating income be affected?
A)Increase $474,000
B)Increase $221,000
C)Decrease $32,000
D)Decrease $56,000

Question

All About Animals has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow:  If $13,000 of fixed costs will be eliminated by discontinuing the Dog food line, how will operating income be affected?
A)Increase $474,000 
B)Increase $221,000 
C)Decrease $32,000 
D)Decrease $56,000

Quizplus · Accepted Answer

From the contribution margin income statement data, we can see that the Dog food line has a contribution margin of $300,000 and a loss of $13,000 (fixed costs). Therefore, discontinuing the Dog food line would result in a decrease of $287,000 in total contribution margin ($300,000 - $13,000). As fixed costs will be reduced by $13,000, we can calculate the impact on operating income as follows:
Operating Income = Total Contribution Margin - Fixed Costs
For All About Animals with both product lines:
Operating Income = $457,000 - $261,000
Operating Income = $196,000
For All About Animals without the Dog food line:
Operating Income = $170,000 - $248,000
Operating Income = -$78,000
Therefore, discontinuing the Dog food line would result in a decrease of $78,000 in operating income ($196,000 - (-$78,000) = $118,000). Hence, the correct choice is C.

All About Animals Has Two Product Lines: Cat Food and Dog