Help me understand this question please!!
The following information is available on Crain Co.’s two product lines:
Chairs Tables
Sales $180,000 $48,000
Variable costs (96,000) (30,000)
Contribution margin 84,000 18,000
Fixed costs:
Avoidable (36,000) (12,000)
Unavoidable (18,000) (10,800)
Operating income (loss) $ 30,000 ($4,800)
Assuming the tables 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?
$13,200
$18,000
$24,000
$28,800
This answer is correct. To make the determination you would compare the amount of revenue from renting the factory space to the contribution margin less the avoidable costs from producing tables. The unavoidable costs allocated to the tables line would be incurred regardless of the decision and therefore are irrelevant. This answer is correct because income would increase by $18,000 [$24,000 rent − ($18,000 contribution margin − $12,000 avoidable costs].
I know you are supposed to ignore sunk costs in determining these type of questions but if the tables line is discontinued then the 18,000 revenue that it produces would not be generated nor the 12,000 costs that are avoidable if the line is discontinued. Therefore wouldnt operating income increase by the 24,000 net of the unavoidable costs (10,800)?
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