Tyler Corporation has provided you with the following budgeted income statement for one of its products:
$$\begin{array} { | l| r| }
\hline \text { Vales revenue } & \$ 800,000 \
\hline \text { Variable costs } & \underline { 540,000 } \
\hline \text { Contribution margin } & \$ 260,000 \
\hline \text { Fixed costs } & \underline { 275,000 } \
\hline \text { Pperating income } & \
\text { loss) } & \$ 15,000 \
\hline
\end{array}$$ Tyler Corporation believes that 70% of the fixed costs would be avoidable if the product line was dropped.Based on the impact on the company's operating income or loss,Tyler should keep the product line.

Question

Tyler Corporation has provided you with the following budgeted income statement for one of its products:
 $$\begin{array} { | l| r| } 
\hline \text { Vales revenue } & \$ 800,000 \
\hline \text { Variable costs } & \underline { 540,000 } \
\hline \text { Contribution margin } & \$ 260,000 \
\hline \text { Fixed costs } & \underline { 275,000 } \
\hline \text { Pperating income } & \
 \text { loss) } & \$ 15,000 \
\hline
\end{array}$$ Tyler Corporation believes that 70% of the fixed costs would be avoidable if the product line was dropped.Based on the impact on the company's operating income or loss,Tyler should keep the product line.

Quizplus · Accepted Answer

If 70% of the fixed costs are avoidable, then dropping the product line would reduce the fixed costs by 70%, resulting in a decrease in the operating loss by a substantial amount. However, since the product line generates a positive contribution margin, dropping it would also result in the loss of the contribution margin, which would increase the operating loss. On balance, the impact of dropping the product line would likely be negative, so Tyler should keep the product line.

Tyler Corporation Has Provided You with the Following Budgeted Income