Suppose Smiley O is considering discontinuing its special oats product line. Assume that during the past year, the

special oats' product line income statement showed the following:

$($Click the icon to view the income statement data.$)($i$)($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 special oats product line?

Begin by preparing a contribution margin income statement for the special oats' product line. $($Use a minus sign or

parentheses to enter a loss.$)$

Sales revenue

Less:

Contribution margin

Less:

Operating income $($loss$)$

More into

Fixed manufacturing overhead costs account for $40\%$ of the cost of goods, while

only $30\%$ of the operating expenses are fixed. Since the special oats line is just

one of the company's cereal operations, only $$725,000$ 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.

Data table