[IAMENOUGH]

Someone please explain how this answer is B.

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

Chairs Tables

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Sales $180,000 $ 48,000

Variable costs (96,000) (30,000)

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Contribution margin

$ 84,000 $ 18,000

Fixed costs:

Avoidable (36,000) (12,000)

Unavoidable (18,000) (10,800)

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Operating income

(loss) $ 30,000 $ (4,800)

========= =========

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

A.$13,200

B.$18,000

C.$24,000

D.$28,800

God Help Me!
AUD 77 - Expires 4/3/16, BEC - Retake July 2015, FAR - AUG 2015, REG - Retake Oct 2015
Using Becker and Ninja
Proverbs 3:5-6

[Anonymous]

If the table line is discontinued, then you will lose…

$48000 sales

-$30000 variable costs

-$12000 unavoidable fixed costs

==========

$6,000 of profits lost

In exchange, $24,000 of rental income is earned. So, $24k-6k=18k increase in income.

[Anonymous]

@Lilla

That $6,000 of profit loss, it can be considered as an opportunity cost right?

[IAMENOUGH]

Thanks Lilla for simplifying it for me!

God Help Me!
AUD 77 - Expires 4/3/16, BEC - Retake July 2015, FAR - AUG 2015, REG - Retake Oct 2015
Using Becker and Ninja
Proverbs 3:5-6

[Anonymous]

@Bolasdehierro Something like that. It's a factor that relates to the opportunity. Given that the opportunity reduces a loss, it's not really a “cost”, but the place you'd plug it in an equation is probably the same.

[Anonymous]

@Lilla

It's probably not a opportunity cost. Maybe it were if they were to mention that the company is either considering to continue with operations or discontinuing, then either one of those would be an opportunity cost (whichever is the best second option).

[Anonymous]

If they were profiting $6,000 off the table line, then stopping production of tables to instead rent the space out, then the $6,000 would be an opportunity cost. This question doesn't specifically say they're halting the tables in order to rent out the space, but I think that would be a safe assumption. They're looking at two options: make tables, or rent space. The next effect on the books is the question asked. Hoewver, if the tables were profiting $6,000 based on variable costs instead of losing $6,000 based on variable costs, then I would consider the $6,000 an opportunity cost based on the wording of this question. Hope that helps.

[Author]

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