DM Corporation has provided you with the following budgeted income statement for one of their products:
DM Corporation believes that 70% of the fixed costs would be avoidable if the product line was dropped. Based on impact to the company operating income, DM should NOT drop the product line.

Question

DM Corporation has provided you with the following budgeted income statement for one of their products:
  DM Corporation believes that 70% of the fixed costs would be avoidable if the product line was dropped. Based on impact to the company operating income, DM should NOT drop the product line.

Quizplus · Accepted Answer

The company should not drop the product line because based on the budgeted income statement, the contribution margin of the product line is greater than the avoidable fixed costs. Therefore, dropping the product line would result in a decrease in operating income.

DM Corporation Has Provided You with the Following Budgeted Income