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: EM133095793

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