DM Corporation has provided you with the following budgeted income statement for one of its products
Sales revenue $700,000
Variable costs (430,000 )
Contribution margin $270,000
Fixed costs (320,000 )
Operating loss $(50,000 )
DM has just encountered environmental problems with the product and will be forced to drop the product line altogether. DM will be able to eliminate 70% of the fixed costs. What will be the impact on operating income of the company?
A) Operating income will decrease by $224,000.
B) Operating income will decrease by $46,000.
C) Operating income will increase by $224,000.
D) Operating income will increase by $46,000.
B .B)
Fixed cost savings (320,000 x 70%) $224,000
Contribution margin lost (270,000 )
Operating loss increase $46,000
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