Solution-What would be the impact on operating income

What would be the impact on operating income

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Question - Omar Industries manufactures two products: Regular and Super. The results of operations for 20x1 follow.

	Regular	Super	Total
Units	10,000	3,700	13,700
Sales revenue	$240,000	$740,000	$980,000
Less: Cost of goods sold	180,000	481,000	661,000
Gross Margin	$60,000	$259,000	$319,000
Less: Selling expenses	60,000	134,000	194,000
Operating income (loss)	$0	$125,000	$125,000

Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed.

Required -

1. Omar Industries wants to drop the Regular product line. If the line is dropped, company-wide fixed manufacturing costs would fall by 10% because there is no alternative use of the facilities. What would be the impact on operating income if Regular is discontinued?

2. Disregard the information in the previous question. If Omar Industries eliminates Regular and uses the available capacity to produce and sell an additional 1,500 units of Super, what would be the impact on operating income?

Reference no: EM133089246

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What would be the impact on operating income

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