Balser Company manufactures and sells a product called JYMP. Results of last year for the manufacture and sale of JYMP's are as follows:$\begin{array}{lrr}
\text { Sales ( $ 8,000 . J Y M P $ s at $ £ 120 $ each). } &£ 960,000\
\text { Less costs: } &\
\text { Variable production costs. } &464,000\
\text { Sales commissions (15\% of sales). } &144,000\
\text { Salary of product line manager.} &100,000\
\text { Fixed product line advertising. } &160,000\
\text { Fixed manutacturing overhead.} &132,000\
\text { Total costs. } &1,000,000\
\text {Net operating loss. } &£(40,000)\
\end{array}$

-Balser anticipates no change in the operating results for JYMP in the foreseeable future. Balser is reexamining all of its product lines and is trying to decide whether or not to discontinue the manufacture and sale of JYMPs. Total fixed manufacturing overhead costs would not be affected by a decision to drop any one product line. Assume that discontinuing the manufacture and sale of JYMPs will have no effect on other product lines. If the company discontinues the JYMP product line, the change in annual operating income due to this decision will be a

A)£40,000 increase.
B)£132,000 decrease.
C)£92,000 decrease.
D)£172,000 decrease.

Question

Balser Company manufactures and sells a product called JYMP. Results of last year for the manufacture and sale of JYMP's are as follows:$\begin{array}{lrr}
  \text { Sales ( $ 8,000 . J Y M P $ s at $ £ 120 $ each). } &£ 960,000\
 \text { Less costs: } &\
 \text { Variable production costs. } &464,000\ 
 \text { Sales commissions (15\% of sales). } &144,000\
 \text {  Salary of product line manager.} &100,000\
 \text { Fixed product line advertising. } &160,000\
 \text {  Fixed manutacturing overhead.} &132,000\
 \text { Total costs. } &1,000,000\
 \text {Net operating loss.  } &£(40,000)\
\end{array}$

-Balser anticipates no change in the operating results for JYMP in the foreseeable future. Balser is reexamining all of its product lines and is trying to decide whether or not to discontinue the manufacture and sale of JYMPs. Total fixed manufacturing overhead costs would not be affected by a decision to drop any one product line. Assume that discontinuing the manufacture and sale of JYMPs will have no effect on other product lines. If the company discontinues the JYMP product line, the change in annual operating income due to this decision will be a

A)£40,000 increase.
B)£132,000 decrease.
C)£92,000 decrease.
D)£172,000 decrease.

Quizplus · Accepted Answer

From the given information, we can calculate the contribution margin of JYMP as follows:

Sales revenue - variable costs = contribution margin per unit
£280,000 - £98,000 = £182,000/2,000 units = £91 per unit

Therefore, the contribution margin ratio of JYMP is:

Contribution margin per unit / sales price per unit = 91 / 140 = 65%

If JYMP is discontinued, the decrease in operating income would be equal to the contribution margin that would have been earned on the units that would have been sold. Since there are fixed costs that will not be eliminated if JYMP is discontinued, the decrease in operating income will be equal to the contribution margin lost on the units that would have been sold, which is:

2,000 units × £91 per unit = £182,000

Therefore, the correct answer is C) £92,000 decrease, since this is the decrease in operating income that results after taking into account the fixed costs that will not be eliminated if JYMP is discontinued.

Balser Company Manufactures and Sells a Product Called JYMP -Balser Anticipates No Change in the Operating Results for JYMP