Suppose

Smiley O

is considering discontinuing its

fruit and nuts

product line. Assume that during the past year, the

fruit and nuts'

product line income statement showed the following:

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(Click the icon for additional information.)If the company decides to discontinue the product line, what will happen to the company's operating income? Should

Smiley O

discontinue the

fruit and nuts

product line?Begin by preparing a contribution margin income statement for the

fruit and nuts'

product line. (Use a minus sign or parentheses to enter a loss.)

Sales revenue
Less:	Variable expenses
Contribution margin
Less:	Fixed expenses
Operating income (loss)

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Data Table

	A	B
1	Sales revenue	$5,300,000
2	Less: Cost of goods sold	5,900,000
3	Gross profit	(600,000)
4	Less: Operating expenses	1,550,000
5	Operating income (loss)	$(2,150,000)

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Fixed manufacturing overhead costs account for 40% of the cost of goods, while only 30% of the operating expenses are fixed. Since the

fruit and nuts

line is just one of the company's

fruit

operations, only

$780,000

of direct fixed costs (the majority of which is advertising) will be eliminated if the product line is discontinued. The remainder of the fixed costs will still be incurred by the company.

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