DM Corporation has provided you with the following budgeted income statement for one of their products: DM has just encountered environmental problems with the product and will be forced to drop the product line altogether.They will be able to eliminate 75% of the fixed expenses.What will be the impact on operating income of the company?

Question

DM Corporation has provided you with the following budgeted income statement for one of their products:  DM has just encountered environmental problems with the product and will be forced to drop the product line altogether.They will be able to eliminate 75% of the fixed expenses.What will be the impact on operating income of the company?

Quizplus · Accepted Answer

To calculate the impact on operating income, we need to calculate the current operating income and then subtract 75% of fixed expenses.

Current operating income = $300,000 - $120,000 - $75,000 - $60,000 = $45,000

75% of fixed expenses = 0.75 * $120,000 = $90,000

New operating income = $45,000 - $90,000 = -$45,000

Therefore, the operating income will decrease by $45,000. 
Choice B is the correct answer.

DM Corporation Has Provided You with the Following Budgeted Income