Tyler Corporation has provided you with the following budgeted income statement for one of their products:
$$\begin{array} { | l | r | }
\hline \text { Sales } & \$ 750,000 \
\hline \text { Variable expenses } & \underline { 500,000 } \
\hline \text { Contribution margin } & \$ 250,000 \
\hline \text { Fixed expenses } & \underline { 280,000 } \
\hline \text { Operating income } & \underline { \$ 30,000 } \
\hline
\end{array}$$ Tyler Corporation believes that 80% of the fixed costs would be avoidable if the product line was dropped. Based on the impact of company's operating income, Tyler should not drop the product line.

Question

Tyler Corporation has provided you with the following budgeted income statement for one of their products:
 $$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 750,000 \
\hline \text { Variable expenses } & \underline { 500,000 } \
\hline \text { Contribution margin } & \$ 250,000 \
\hline \text { Fixed expenses } & \underline { 280,000 } \
\hline \text { Operating income } & \underline { \$ 30,000 } \
\hline
\end{array}$$ Tyler Corporation believes that 80% of the fixed costs would be avoidable if the product line was dropped. Based on the impact of company's operating income, Tyler should not drop the product line.

Quizplus · Accepted Answer

If 80% of the fixed costs would be avoidable if the product line was dropped, then the company would save $280,000 * 0.80 = $224,000 in fixed costs. This would increase the operating income by $224,000, resulting in a new operating income of $30,000 + $224,000 = $254,000. Therefore, the company should not drop the product line.

Tyler Corporation Has Provided You with the Following Budgeted Income