Question
Omar Industries manufactures two products: Regular and Super. The results of operations for 20x1 follow. Regular Super Total Units 12,000 4,300 16,300 Sales revenue $
Omar Industries manufactures two products: Regular and Super. The results of operations for 20x1 follow.
Regular | Super | Total | |||||||||
Units | 12,000 | 4,300 | 16,300 | ||||||||
Sales revenue | $ | 360,000 | $ | 989,000 | $ | 1,349,000 | |||||
Less: Cost of goods sold | 288,000 | 645,000 | 933,000 | ||||||||
Gross Margin | $ | 72,000 | $ | 344,000 | $ | 416,000 | |||||
Less: Selling expenses | 72,000 | 203,000 | 275,000 | ||||||||
Operating income (loss) | $ | 0 | $ | 141,000 | $ | 141,000 | |||||
Fixed manufacturing costs included in cost of goods sold amount to $2 per unit for Regular and $30 per unit for Super. Variable selling expenses are $3 per unit for Regular and $30 per unit for Super; remaining selling amounts are fixed. Omar Industries wants to drop the Regular product line. If the line is dropped, company-wide fixed manufacturing costs would fall by 20% because there is no alternative use of the facilities. What would be the impact on operating income if Regular is discontinued?
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