The manager at the Sports Shop sells three types of sport products, small, medium, and large
Small Medium Large
Sales $70,000 $100,000 $30,000
Variable costs 40,000 52,000 18,000
Contribution margin 30,000 48,000 12,000
Fixed costs:
Avoidable 7,000 17,000 10,000
Unavoidable 8,000 10,000 6,200
Operating income $15,000 $21,000 ($4,200 )
The manager at the Sports Shop needs to determine if the large product needs to be dropped because it is reporting a loss. Compute the increase or decrease in operating income if the manager drops the large product and does not replace it.
If the manager dropped the large product and rented out the space used to house the product for $10,000 per year, what is the increase or decrease in operating income?
A) $1,000 increase; $6,000 decrease
B) $2,000 decrease; $8,000 increase
C) $3,000 increase; $10,000 decrease
D) $4,000 decrease; $12,000 increase
E) $5,000 increase; $14,000 decrease
B
Explanation: B) If the manager drops the large product, the company will lose $12,000 in contribution margin and will only save $10,000 in avoidable fixed costs. Without the large product, operating income is $2,000 less than currently reported.
Operating income impact on space rented: [($10,000 - $2,000 )] = $8,000 increase
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