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Peppers Automotive produces auto parts for various automotive retailers. Peppers is evaluating the exhaust system division of the company and has come up with the following data for the year: net revenues are $1,420,000, variable costs are $496,000, and fixed costs are $582,000. Of the fixed costs, controllable fixed costs are $128,000 and noncontrollable fixed costs are $454,000.

Peppers Automotive has further analyzed the exhaust system division into three products: exhaust pipes, intake valves, and intake pipes. The income statement is available below.

If intake valves were dropped, what would be the change in profits in the short run and the long run, respectively?

	Exhaust Pipes	Intake Valves	Intake Pipes
Net revenues	$ 640,000	$ 440,000	$ 340,000
Variable costs	64,000	220,000	212,000
Contribution margin	576,000	220,000	128,000
Controllable fixed costs	64,000	64,000	0
Controllable margin	512,000	156,000	128,000
Noncontrollable fixed costs	170,000	220,000	64,000
Contribution by profit center	$ 342,000	$ (64,000)	$ 64,000

multiple choice

• Short run: $156,000 decrease; long run: $64,000 increase

• Short run: $220,000 increase; long run: $64,000 decrease

• Short run: $156,000 increase; long run: $64,000 decrease

• Short run: $64,000 increase; long run: $156,000 decrease