Answered: Suppose Grainy Day is considering…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter18: Pricing And Profitability Analysis

Section: Chapter Questions

Problem 28P: The following information pertains to Vladamir, Inc., for last year: There are no work-in-process...

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Suppose Grainy Day is considering discontinuing its tasty loops product line. Assume that during the past year, the tasty loops' product line income statement showed the following:

	A	B
1	Sales revenue	$7,550,000
2	Less: Cost of goods sold	6,400,000
3	Gross profit	1,150,000
4	Less: Operating expenses	1,650,000
5	Operating income (loss)	$(500,000)

Fixed manufacturing overhead costs account for 40% of the cost of goods, while only 30% of the operating expenses are fixed. Since the tasty loops line is just one of the company's cereal operations, only $780,000 of direct fixed costs (the majority of which is advertising) will be eliminated if the product line is discontinued. The remainder of the fixed costs will still be incurred by the company.

If the company decides to discontinue the product line, what will happen to the company's operating income? Should Grainy Day discontinue the tasty loops product line?

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