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Dropping a product

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3 Magnolia Park Company has three products, Regular, Deluxe & Economy. The following information is available:

Regular Deluxe Economy
Sales $52,500 $76,500 $21,600
Variable costs 31,500 40,800 13,125
Contribution margin 21,000 35,700 8,475
Fixed costs:
Avoidable 8,100 15,300 5,700
Unavoidable 4,950 8,100 4,725
Operating income $7,950 $12,300 ($1,950)

3.1 The company is thinking of dropping the Economy model because it is reporting a loss. Assuming Magnolia Park drops this product and does not replace it, operating income will:

Increase by ______________________________

Decrease by ______________________________

3.2 Assuming the Economy product is discontinued and the space formerly used to produce the product is rented for $5,750 per year, operating income will:

Increase by ______________________________

Decrease by ______________________________

Solution Preview

3 Magnolia Park Company has three products, Regular, Deluxe & Economy. The following information is available:

Regular Deluxe Economy
Sales $52,500 $76,500 $21,600
Variable costs 31,500 40,800 13,125
Contribution margin 21,000 35,700 8,475
Fixed costs:
Avoidable 8,100 15,300 5,700
Unavoidable 4,950 8,100 4,725
Operating income $7,950 $12,300 ($1,950)

3.1 The ...

Solution Summary

The solution explains the effect on income upon dropping a product.

$2.19