All About Animals has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow: Assuming the Dog food is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $26,000 per year, how will operating income be affected?
A)Increase $254,000
B)Increase $527,000
C)Decrease $19,000
D)Increase $19,000

Question

All About Animals has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow:  Assuming the Dog food is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $26,000 per year, how will operating income be affected?
A)Increase $254,000 
B)Increase $527,000 
C)Decrease $19,000 
D)Increase $19,000

Quizplus · Accepted Answer

If the Dog food product line is discontinued, there will be a decrease in revenue of $550,000 ($1,100,000 - $550,000) and a decrease in variable costs of $280,000 ($550,000 x 0.5). This results in a decrease in contribution margin of $270,000 ($550,000 - $280,000). However, since total fixed costs remain unchanged, operating income will decrease by $19,000 ($251,000 - $270,000 + $26,000). Therefore, the correct answer is C, decrease $19,000. Neither of the other answer choices accurately reflect the impact on operating income.

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