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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
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?
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