Percy Productions has three models: D, E, and F. The following information is available: Percy Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed costs are unavoidable. Percy Productions discontinues model F and rents the space formerly used to produce product F for $18,000 per year, what effect will this have on operating income?
A)Increase $19,000
B)Increase $8000
C)Decrease $19,000
D)Decrease $8000

Question

Percy Productions has three models: D, E, and F. The following information is available:  Percy Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed costs are unavoidable. Percy Productions discontinues model F and rents the space formerly used to produce product F for $18,000 per year, what effect will this have on operating income?
A)Increase $19,000 
B)Increase $8000 
C)Decrease $19,000 
D)Decrease $8000

Quizplus · Accepted Answer

Discontinuing model F will reduce the fixed costs associated with producing it, which will increase operating income. The rent revenue from renting out the space formerly used to produce product F is not relevant to this analysis since it is a separate revenue stream. The increase in operating income will be equal to the amount of fixed costs saved by discontinuing model F, which is $8,000. Therefore, the correct answer is B) Increase $8,000.

Percy Productions Has Three Models: D, E, and F