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

question 147

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 $25,000 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 $5,000.
• C) Operating income will decrease by $25,000.
• D) Operating income will decrease by $5,000.

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Definitions:

Net Present Value

A method used in capital budgeting to assess the profitability of an investment or project, considering the time value of money.

Operating Cash Inflows

Cash received by a company from its operational activities, such as sales revenue minus the operating expenses.

Working Capital Investment

Funds invested in the short-term assets of a company, such as inventory and receivables, to support its day-to-day operations.

Profitability Index

A financial tool used to measure the relative profitability of an investment, calculated as the present value of future cash flows divided by the initial investment cost.