Question

State Road Fabricators Inc. is considering eliminating Model A02777 because of losses over the past quarter. The past three months of information for Model A02777 are summarized​ below: Sales​ (1,100 units) ​$370,000 Manufacturing​ costs: Direct materials ​160,000 Direct labor​ ($15 per​ hour) ​80,000 Overhead ​150,000 Operating loss ​($20,000) Overhead costs are​ 75% variable and the remaining​ 25% is depreciation of special equipment for model A02777 that has no resale value. If Model A02777 is dropped from the product​ line, operating income will​ ________.
A. decrease by​ $20,000
B. increase by​ $37,500
C. decrease by​ $17,500
D. increase by​ $20,000

Answer 1

Answer:

Option (C) is correct.

Explanation:

Manufacturing costs:

= Direct Materials + Direct Labor + Variable overhead

= $160,000 + $80,000 + (150,000 × 75%)

= $160,000 + $80,000 + $112,500

= $352,500

Operating income:

= Sales​ (1,100 units) - Manufacturing costs

= $370,000 - $352,500

= $17,500

Therefore, if Model A02777 is dropped from the product​ line, operating income will​ decrease by​ $17,500.