The internal financial statements of Vera Incorporated show that their beaded purses incurred an operating loss in the most recent year. There were 25,000 purses sold in that year. Selected financial information about the purse line follows. If the line of purses were to be discontinued, the company would avoid $18,000 in fixed costs per year.
If Vera Incorporated were to discontinue the line of purses, the change in annual operating income would be a(n)
A)increase in total operating income of $81,000.
B)decrease in total operating income of $2000.
C)increase in total operating income of $2000.
D)decrease in total operating income of $81,000.

Question

The internal financial statements of Vera Incorporated show that their beaded purses incurred an operating loss in the most recent year. There were 25,000 purses sold in that year. Selected financial information about the purse line follows.  If the line of purses were to be discontinued, the company would avoid $18,000 in fixed costs per year.
If Vera Incorporated were to discontinue the line of purses, the change in annual operating income would be a(n)
A)increase in total operating income of $81,000. 
B)decrease in total operating income of $2000. 
C)increase in total operating income of $2000. 
D)decrease in total operating income of $81,000.

Quizplus · Accepted Answer

To calculate the change in annual operating income if the line of purses is discontinued, we need to compare the current operating income of the line of purses to the avoidable fixed costs if the line is discontinued.

Current operating income = ($21 - $18.40) x 25,000 = $6,500
If the line is discontinued, avoidable fixed costs = $18,000
Change in operating income = $6,500 - $18,000 = -$11,500

Therefore, the answer is D, a decrease in total operating income of $81,000.

The Internal Financial Statements of Vera Incorporated Show That Their