Suppose Wheatum is considering discontinuing its bran flakes bran flakes product line. Assume that during the past year, the bran flakes' bran flakes' product line income statement showed the following: Fixed manufacturing overhead costs account for 40% of the cost of goods, while only 30% of the operating expenses are fixed. Since the bran flakes bran flakes line is only one of the company's cereal operations, only $740,000 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. If the company decides to discontinue the product line, what will happen to the company's operating income? Should Wheatum discontinue the product line?
Begin by preparing a contribution margin income statement for the bran flakes 'bran flakes' product line. (Use a minus sign or parentheses to enter a loss.)
Sales revenue
Less: contribution margin
Less: Operating income (loss)
DATA__________________________ TABLE_
Sales revenue.................................. $5,350,000
Less: Cost of goods sold .................... 5,950,000
Gross profit ................................... -600,000
Less: Operating expenses .................. 1,400,000
Operating income (loss) .................... ($2,000,000)