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. Assume Percy Productions is able to increase the sales revenue of product F to $32,000 with no change in volume of units sold and no change in variable costs or fixed costs. What effect will this have on operating income?
A)Increase $11,000
B)Increase $24,000
C)Decrease $11,000
D)Decrease $24,000

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. Assume Percy Productions is able to increase the sales revenue of product F to $32,000 with no change in volume of units sold and no change in variable costs or fixed costs. What effect will this have on operating income?
A)Increase $11,000 
B)Increase $24,000 
C)Decrease $11,000 
D)Decrease $24,000

Quizplus · Accepted Answer

Since there is no change in volume of units sold and no change in variable costs or fixed costs, the only change will be in sales revenue. Increasing the sales revenue of product F to $32,000 will increase operating income by $11,000 (the contribution margin of F is $11,000, and since there is no change in variable costs or fixed costs, this increase in revenue will result in an increase in operating income of $11,000). Therefore, the correct answer is A) Increase $11,000.

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