Suppose Eagle Products is considering discontinuing its soy cereal product line. Assume that during the past year, the soy cereal product line income statement showed the following:

Gross profit………………………………….$ 5,250,000

Less: Operating expenses…………….$ (1,000,000)

Operating income (loss)……………………6,250,000

Less: Cost of goods sold………………….1,550,000

Sales revenue……………………………..$ (2,550,000)

Fixed manufacturing overhead costs account for 40% of the cost of goods, while only 30% of the operating expenses are fixed. Since the soy cereal line is just one of the company’s breakfast cereals, only $725,000 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 Eagle Products discontinue the soy cereal product line?



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