Pottery Unlimited has two product lines: cups and pitchers. Income statement dat for the most recent year follow:
|Operating income (loss)||$29,000||$37,000||$(8,000)|
If $24424 in fixed costs will be eliminated by dropping the CUP line, how will operating income be affected?
Relevant Costs in Eliminating a Product:
Companies that deal with multiple products are often faced with a situation, where one or other products need to be discontinued. It is for the company to thoroughly evaluate the situation before it can decide upon the curtailing of its product line through differential analysis. Relevant costs must only be considered in the differential analysis for the alternatives available.
Answer and Explanation:
Computation of operating income (loss) for each of the three scenarios:
|Both Pitchers & Cups||Pitchers only||Cups only|
|Operating income (loss)||$29,000.00||-21576||23424|
The total operating income, if both the product lines are continued = $29,000
The total operating income (loss) if only Pitchers are continued = -$21,756
The total operating income, if only Cups are continued = $23,424
It is given that if a product line is dropped, fixed costs will be reduced by $24,424.
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from Accounting 301: Applied Managerial AccountingChapter 9 / Lesson 12