Tyler Company has provided you with the following budgeted income statement for one of their products:
$$\begin{array} { | l | l | }
\hline \text { Sales } & \$ 750000 \
\hline \text { Variable expenses } & \$ 00000 \
\hline \text { Contribution margin } & \$ 250000 \
\hline \text { Fixed expenses } & \underline { 280000 } \
\hline \text { Operating loss } & ( \$ 30000 ) \
\hline
\end{array}$$
Tyler Company believes that 80% of the fixed costs would be avoidable if the product line was dropped.Based on the impact of company's operating profit,Tyler should not drop the product line.

Question

Tyler Company has provided you with the following budgeted income statement for one of their products:
 $$\begin{array} { | l | l | } 
\hline \text { Sales } & \$ 750000 \
\hline \text { Variable expenses } & \$ 00000 \
\hline \text { Contribution margin } & \$ 250000 \
\hline \text { Fixed expenses } & \underline { 280000 } \
\hline \text { Operating loss } & ( \$ 30000 ) \
\hline
\end{array}$$ 
Tyler Company believes that 80% of the fixed costs would be avoidable if the product line was dropped.Based on the impact of company's operating profit,Tyler should not drop the product line.

Quizplus · Accepted Answer

If 80% of the fixed costs are avoidable, then the company would save $280,000 * 0.80 = $224,000 in fixed costs if the product line is dropped. This would result in an operating profit of $250,000 - $224,000 = $26,000. Therefore, the company should not drop the product line.

Tyler Company Has Provided You with the Following Budgeted Income