Castillo Corporation has provided you with the following budgeted income statement for one of its products: $$\begin{array} { | l | r | }
\hline \text { Sales revenue } & \$ 700,000 \
\hline \text { Variable costs } & ( 430,000 ) \
\hline \text { Contribution margin } & \$ 270,000 \
\hline \text { Fixed costs } & \underline { ( 320,000 ) } \
\hline \text { Operating loss } & \$ ( 50,000 \
\hline
\end{array}$$ Castillo has just encountered environmental problems with the product and will be forced to drop the product line altogether.Castillo will be able to eliminate 60% of the fixed costs.What will be the impact on operating income of the company?

Question

Castillo Corporation has provided you with the following budgeted income statement for one of its products: $$\begin{array} { | l | r | } 
\hline \text { Sales revenue } & \$ 700,000 \
\hline \text { Variable costs } & ( 430,000 ) \
\hline \text { Contribution margin } & \$ 270,000 \
\hline \text { Fixed costs } & \underline { ( 320,000 ) } \
\hline \text { Operating loss } & \$ ( 50,000 \
\hline
\end{array}$$ Castillo has just encountered environmental problems with the product and will be forced to drop the product line altogether.Castillo will be able to eliminate 60% of the fixed costs.What will be the impact on operating income of the company?

Quizplus · Accepted Answer

To find the impact on operating income, we need to calculate the current operating income and then subtract the 60% of the fixed costs. 
Current operating income = $390,000 - $201,000 - $9,000 = $180,000 
60% of fixed costs = 0.6($174,000) = $104,400 
New operating income = $180,000 - $104,400 = $75,600 
Therefore, operating income will decrease by $78,000 ($75,600 - $153,600).

Castillo Corporation Has Provided You with the Following Budgeted Income