Bally Company has three product lines: A,B and C.The following annual information is available:
$\begin{array}{llll}&\text { Product A }&\text { Product B }&\text { Product C }\
\text { Sales } & \$ 60,000 & \$ 90,000 & \$ 24,000 \
\text { Variable costs } & \underline{36,000} & \underline{48,000} & 20,000\
\text { Contribution margin } & 24,000 & 42,000 & 4,000 \
\text { Avoidable fixed costs } & 9,000 & 18,000 & 3,000 \
\text { Unavoidable fixed costs } & 6,000 & 9,000 & 2,400\
\text { Operating income(loss) }&\$9,000&\$15,000&\$(1,400)
\end{array}$
Assume Bally Company drops Product C.What will happen to operating income?
A) increase by $1,400
B) increase by $3,800
C) decrease by $1,000
D) decrease $1,400

Question

Quizplus · Accepted Answer

Dropping Product C would eliminate its contribution margin of $4,000, but it would also eliminate its avoidable fixed costs of $3,000. The net effect would be a decrease in operating income by $1,000 ($4,000 - $3,000).

Bally Company Has Three Product Lines: A,B and C Assume Bally Company Drops Product C