DM Corporation has provided you with the following budgeted income statement for one of their products: $\begin{array}{|l|r|}
\hline\text { Sales } & \$ 700,000 \
\hline \text { Variable expenses } & (430,000) \
\hline \text { Contribution margin } & \$ 270,000 \
\hline \text { Fixed expenses } & (300,000) \
\hline \text { Operating loss } & (\$ 30,000) \
\hline
\end{array}$ 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

Quizplus · Accepted Answer

The product line has an operating loss of $30,000. Eliminating 75% of the fixed expenses ($300,000 * 75% = $225,000) will save $225,000. The net impact on operating income will be a decrease of $45,000 ($30,000 loss + $225,000 savings).

DM Corporation Has Provided You with the Following Budgeted Income