[Anonymous]

Hi guys,

do you know why the $18,000?

The following information is available on Crain Co’s two product lines:

Chairs Tables

Sales 180,000 48,000

VC (96,000) (30,000)

CM 84,000 18,000

Avoidable (36,000) (12,000)

Unavaoidable (18,000) (10,800)

Operating Income 30,000 (4,800)

Assuming the table line is discontinued, and the factory space previously used to make table is rented for $24,000 per year, operating income will increase by what amount?

a. 24,000

b. 28,800

c. 13,200

d. 18,000

d is correct.

[rzrbkfaith]

Rents – (Contribution Margin – Avoidable Costs)

You have to look at the “relevant” information… or what would change should the Table line be discontinued. Contribution margin would be foregone, along with avoidable costs.

AUD - 99
BEC - 97
REG - 91
FAR - 1/8/16

[h0wdyus]

The unavoidable cost of tables (10800) will be absorbed by the chairs or other income. The contribution to operating income for table in this case is CM 18000 – Avoidable cost 12000 = 6000 . So if you discontinue table you won't earn $6000, but will earn 24000. So 24000-6000 is the increase in operating income.

I hope this help, it is kind of tough to explain such questions.

FAR - 81 29th Aug 2013
AUD - 84
REG - 82
BEC - 89 29th Aug 2014
Using Yager

FROM NJ

[Anonymous]

@rzrbkfaith and @h0wdyus

Thank you so much! I understand clearly.

Best of wishes to you

[Author]

Replies