Suppose Quacker is considering discontinuing its fruity ring

Suppose Quacker is considering discontinuing its fruity rings product line. Assume that during the past year, the fruity rings\' product line income statement showed the following ?(Click the icon to view the income statement data) 0 (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 Quacker discontinue the fruity rings product line? Begin by preparing a contribution margin income statement for the fruity rings\' product line. (Use a minus sign or parentheses to enter a loss.) Sales revenue Less: Variable expenses Contribution margin 5350000 ess Operating income (loss) Data Table Sales revenue Less: Cost of goods sold Gross proft Less: Operating expenses Operating income (loss) $ 5,350,000 6,550,000 (1,200,000) 1,550,000 $ (2,750,000) Print Done More Info Fixed manufacturing overhead costs account for 40% of the cost of goods, while only 30% of the operating expenses are fixed. Since the fruity rings 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. Print Done

Solution

Contribution margin income statement :

Net operating income when discontinue = 3085000-730000 = -2355000

Company should discontinue product line

Sales	5350000
Less: Variable cost (6550000*60%+1550000*70%)	-5015000
Contribution margin	335000
Less: Fixed cost (6550000*40%+1550000*30%)	-3085000
Net operating income (loss) When continue	-2750000