Question

The Consumer Division lost $28,000 and the Industrial Division had operating income of $58,000. Management has analyzed the situation and wants you to do a differential analysis to determine the increase or decrease in overall operating income based on the following:
Expected decrease in revenues $280,000
Expected decrease in total variable costs $200,000
Expected decrease in fixed costs $102,000

a. $2,000 increase in operating income
b. $80,000 decrease in operating income
c. $22,000 increase in operating income
d. $80,000 decrease in operating income

Answer 1

Answer: c. $22,000 increase in operating income

Explanation:

Expected decrease in revenues                                       -$280,000

Expected decrease in total variable costs                        (-$200,000)

Expected decrease in fixed costs                                      (-$102,000)

Expected increase(decrease) in operating income            $22,000

Costs are to be deducted from revenues so if the costs are decreasing, the mathematical treatment would be to add the decrease to the revenues which is how the above was calculated.