Macaulay Company Has Three Product Lines-D, E, and F Macaulay Company Is Thinking of Dropping Product Line F Because

question 44

Multiple Choice

Macaulay Company has three product lines-D, E, and F. The following information is available: $$\begin{array} { | l | r | r | r | } \hline & { \text { D } } & { \text { E } } &{ \text { F } } \\\hline \text { Sales } & \$ 70,000 & \$ 40,000 & \$ 30,000 \\\hline \text { Variable costs } & \underline { 40,000 } & \underline { ( 20,000 } & \underline { ( 10,000 } ) \\\hline \text { Contribution margin } & 30,000 & 20,000 & 20,000 \\\hline \text { Fixed expenses } & \underline { ( 15,000 } & \underline { ( 15,000 } ) & \underline { ( 25,000 } ) \\\hline \text { Operating income (loss) } & \$ 15,000 & \$ 5,000 & \underline { ( \$ 5,000 } \\\hline\end{array}$$ Macaulay Company is thinking of dropping product line F because it is reporting an operating loss. Assume that $15,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating income?

• A) Operating income will increase by $25,000.
• B) Operating income will increase by $20,000.
• C) Operating income will decrease by $5,000.
• D) Operating income will decrease by $15,000.

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Definitions:

Economic Profits

The difference between total revenue and total costs, including both explicit and implicit costs, indicating the profitability of a firm beyond normal returns.

Quantity of Resources

The total amount of inputs available for the production process, including labor, capital, land, and raw materials.

Price-Taker Market

A market situation in which individual buyers or sellers have no influence on the price of a product, often due to the product being completely standardized and numerous participants.