Ajax company has four product lines, one of which reported the following financial results for the current year: If this product line is eliminated, 60% of the fixed expenses can be eliminated because they are direct fixed costs, and the remaining 40% of the fixed costs will be allocated to other product lines because they are allocated fixed costs. If management decides to eliminate this product line, the company's operating income is expected to
A) increase by $50,000.
B) decrease by $14,000.
C) decrease by $104,000.
D) increase by $14,000.

Question

Ajax company has four product lines, one of which reported the following financial results for the current year:  If this product line is eliminated, 60% of the fixed expenses can be eliminated because they are direct fixed costs, and the remaining 40% of the fixed costs will be allocated to other product lines because they are allocated fixed costs. If management decides to eliminate this product line, the company's operating income is expected to
A) increase by $50,000. 
B) decrease by $14,000. 
C) decrease by $104,000. 
D) increase by $14,000.

Quizplus · Accepted Answer

(Contribution margin - Fixed expenses eliminated = Net Income increase or net loss decrease); $40,000 - ($90,000 x .60) = $14,000 (increase)

Ajax Company Has Four Product Lines, One of Which Reported