Suppose McCain is considering dropping its sweet potato fries product line. Assume that during the past year, the sweet potato fries product line income statement showed the following:
Sales................................................................................................. $7,600,000
Cost of goods sold............................................................................ 6,400,000
Gross profit...................................................................................... 1,200,000
Operating expenses.......................................................................... 1,400,000
Operating loss.................................................................................. $ (200,000)
Fixed manufacturing overhead costs account for 40% of the cost of goods, while only 30% of the operating expenses are fixed. Since the sweet potato fries line is only one of McCain’s French fries, only $750,000 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 McCain. If the company decides to drop the product line, what will happen to the company’s operating income? Should McCain drop the product line?