Suppose Wheatum is considering discontinuing its yummy pebbles product line. Assume that during the past year, the yummy pebbles' product line income statement showed the following:

View the income statement data.

View the additional information.

If the company decides to discontinue the product line, what will happen to the company's operating income? Should Wheatum discontinue the yummy pebbles product line?

Begin by preparing a contribution margin income statement for the yummy pebbles' product line. $($Use a minus sign or parentheses to enter a loss.$)$

Sales revenue

Less:

Contribution margin

Less:

Operating income $($loss$)$

Incremental Analysis for Discontinuation Decision

Contribution margin lost if yummy pebbles is discontinued

Less: Fixed cost savings if yummy pebbles is discontinued

Operating income if yummy pebbles is discontinued

If Wheatum discontinued the yummy pebbles product line, it will income. Therefore, Wheatum discontinue this product line.

Additional information

Fixed manufacturing overhead costs account for $40\%$ of the cost of goods, while only $30\%$ of the operating expenses are fixed. Since the yummy pebbles line is just one of the company's cereal operations, only $$730,000$ 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.

Income statement data