The internal financial statements of Pierce Solutions show that their product, LX90, incurred an operating loss in the most recent year. There were 20,000 units of LX90 sold in that year. Selected financial information about product LX90 follows.
If product LX90 were to be dropped, the company would avoid $16,000 in fixed costs per year.
If Pierce Solutions were to drop product LX90, the change in annual operating income would be a(n)

Question

The internal financial statements of Pierce Solutions show that their product, LX90, incurred an operating loss in the most recent year. There were 20,000 units of LX90 sold in that year. Selected financial information about product LX90 follows. 
If product LX90 were to be dropped, the company would avoid $16,000 in fixed costs per year.
If Pierce Solutions were to drop product LX90, the change in annual operating income would be a(n)

Quizplus · Accepted Answer

Currently, the contribution margin for LX90 is $9 per unit ($33 selling price - $12 variable cost - $12.50 allocated fixed costs - $0.50 direct fixed costs). 
Therefore, the total contribution margin for LX90 is $180,000 (20,000 units x $9 contribution margin). 
However, if the company drops LX90, it would save $16,000 in fixed costs per year. 
Thus, the total operating income would decrease by $44,000 ($180,000 - $16,000 - $208,000).

The Internal Financial Statements of Pierce Solutions Show That Their