Question
Oneco Industries manufactures two products: Works and Best. The results of operations for 20x1 follow. Works Best Total Units 10,000 4,100 14,100 Sales revenue $
Oneco Industries manufactures two products: Works and Best. The results of operations for 20x1 follow.
Works | Best | Total | |||||||||
Units | 10,000 | 4,100 | 14,100 | ||||||||
Sales revenue | $ | 250,000 | $ | 943,000 | $ | 1,193,000 | |||||
Less: Cost of goods sold | 200,000 | 574,000 | 774,000 | ||||||||
Gross Margin | $ | 50,000 | $ | 369,000 | $ | 419,000 | |||||
Less: Selling expenses | 50,000 | 226,000 | 276,000 | ||||||||
Operating income (loss) | $ | 0 | $ | 143,000 | $ | 143,000 | |||||
Fixed manufacturing costs included in cost of goods sold amount to $2 per unit for Works and $20 per unit for Best. Variable selling expenses are $3 per unit for Works and $20 per unit for Best; remaining selling amounts are fixed.
Oneco Industries wants to drop the Works 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 Works is discontinued?
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