Mission Company has three product lines: D, E, and F. The following information is available: Mission Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Assume Mission Company is able to increase the sales revenue of product F to $32,000 with no change in volume of units sold and no change in variable costs or fixed costs. What affect will this have on operating income?
A)Increase $40,000
B)Increase $12,000
C)Decrease $12,000
D)Decrease $20,000

Question

Mission Company has three product lines: D, E, and F. The following information is available:  Mission Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Assume Mission Company is able to increase the sales revenue of product F to $32,000 with no change in volume of units sold and no change in variable costs or fixed costs. What affect will this have on operating income?
A)Increase $40,000 
B)Increase $12,000 
C)Decrease $12,000 
D)Decrease $20,000

Quizplus · Accepted Answer

If Mission Company is able to increase the sales revenue of product F to $32,000 with no change in volume of units sold and no change in variable costs or fixed costs, the operating income will increase by the amount of the operating loss. So, the increase in operating income will be $12,000 ($20,000 operating loss eliminated by the $32,000 increase in sales revenue).

Mission Company Has Three Product Lines: D, E, and F