Victor Corporation has provided you with the following budgeted income statement for one of its products:
$\begin{array}{|l|r|}
\hline \text { Sales revenue } & \$ 750,000 \
\hline \text { Variable costs } & \underline{500,000} \
\hline \text { Contribution margin } & \$ 250,000 \
\hline\text { Fixed costs } & 280,000 \
\hline \text { Operating income } & \
\text { (loss) } & (\$ 30,000 \
\hline
\end{array}$
Victor Corporation believes that 65% 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,Victor should keep the product line.

Question

Victor Corporation has provided you with the following budgeted income statement for one of its products:
 $\begin{array}{|l|r|}
\hline \text { Sales revenue } & \$ 750,000 \
\hline \text { Variable costs } & \underline{500,000} \
\hline \text { Contribution margin } & \$ 250,000 \
\hline\text { Fixed costs } & 280,000 \
\hline \text { Operating income } & \
\text { (loss) } & (\$ 30,000 \
\hline
\end{array}$
 Victor Corporation believes that 65% 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,Victor should keep the product line.

Quizplus · Accepted Answer

Dropping the product line would eliminate the contribution margin of $250,000, but only $182,000 (65% of $280,000) of fixed costs would be avoided, leading to a worse financial situation than keeping the product line.

Victor Corporation Has Provided You with the Following Budgeted Income