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Blossom Trivia Co. manufactures and sells two trivia products, the Square Trivia Game and the Round Trivia Game. Last quarter’s operating profits, by product, and for the company as a whole, were as follows: Square Round Total Sales revenue $11,000 $6,600 $17,600 Variable expenses 4,400 2,900 7,300 Contribution margin 6,600 3,700 10,300 Fixed expenses 2,750 4,200 6,950 Operating income $ 3,850 $(500 ) $ 3,350 Forty percent of the Round Game’s fixed costs could have been avoided if the game had not been produced or sold. If the Round Game had been discontinued before the last quarter, what would operating income have been for the company as a whole?

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anthougo

Answer:

Blossom Trivia Co.

Quarter Operating Income for the whole company with Round Game discontinued:

Sales Revenue = $11,000

Variable expenses = $4,400

Contribution margin = $6,600

Fixed expenses = $5,270 ($2,750 + 60% of $4,200)

Operating Income = $1,330

Explanation:

If Round Game had been discontinued, the company would have lost $2020 ($3,700 - $1680).  This is the difference between the contribution made by Round Game to its relevant fixed cost of $1,680 or 40% of allocated fixed costs.

The implication is that business decisions should not be based solely on the net operating income.  More analysis and investigation need to be undertaken whenever decisions to discontinue a product line is being contemplated.

From our analysis above, Blossom Trivia Co. would have been worse-off in operating income if Round Game was discontinued without deep analysis.

Though, Round Game was allocated fixed cost of $4,200, what was relevantly incurred by Round Game as a product line was $1,680.

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