Licuado Juice Company has four product lines; Orange, Tomato, Carrot, and Grape. Shown below is last year's income statement segmented by product line: Net operating income last year for Licuado Company as a whole was $24,800.
-If the Carrot product line would have been dropped at the beginning of last year, how would this have changed the net operating income of Licuado Company as a whole?
A) $2,400 increase
B) $3,000 decrease
C) $5,400 increase
D) $12,000 decrease

Question

Licuado Juice Company has four product lines; Orange, Tomato, Carrot, and Grape. Shown below is last year's income statement segmented by product line:  Net operating income last year for Licuado Company as a whole was $24,800.
-If the Carrot product line would have been dropped at the beginning of last year, how would this have changed the net operating income of Licuado Company as a whole?
A) $2,400 increase 
B) $3,000 decrease 
C) $5,400 increase 
D) $12,000 decrease

Quizplus · Accepted Answer

To find out how dropping the Carrot product line would affect the net operating income, we need to calculate the contribution margin of that line. 
Carrot product line's contribution margin = ($16,500 - $9,000) = $7,500 
This is currently contributing to the overall net operating income. 
Therefore, dropping it would reduce the overall net operating income by the same amount: $24,800 - $7,500 = $17,300. 
This is a decrease of $3,000 from the original net operating income. Thus, option B is the correct answer.

Licuado Juice Company Has Four Product Lines; Orange, Tomato, Carrot