Suppose Crispy Pops is considering dropping its Special Oats product line. Assume that during the past year, Special Oats’ product line income statement showed the following:
Sales................................................................................................. $7,400,000
Cost of goods sold............................................................................ 6,150,000
Gross profit...................................................................................... 1,250,000
Operating expenses.......................................................................... 1,350,000
Operating loss.................................................................................. $(100,000)
Fixed manufacturing overhead costs account for 40% of the cost of goods, while only 30% of the operating expenses are fixed. Since the Special Oats line is only one of Crispy Pops’ breakfast cereals, only $730,000 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 Crispy Pops. If the company decides to drop the product line, what will happen to the company’s operating income? Should Crispy Pops drop the product line?