Problem
The segmented income statement for XYZ Company for the year ended December 31, 2016, follows: XYZ COMPANY Segmented Income Statement For the Year Ended December 31, 2016 Total Company Product A Product B Product C Sales $ 597,000 $ 308,000 $ 117,000 $ 172,000 Variable expenses 268,000 146,000 55,000 67,000 Contribution margin $ 329,000 $ 162,000 $ 62,000 $ 105,000 Fixed expenses 272,000 159,000 42,000 71,000 Operating income $ 57,000 $ (3,000 ) $ 20,000 $ 34,000 The company is concerned about the performance of product A, and you have been asked to analyze the situation and recommend to the president whether to continue or discontinue the product. During your investigation, you discover that certain fixed expenses are traceable directly to each product line as indicated here: Total Company Product A Product B Product C Direct fixed expenses $99,000 $74,000 $8,000 $17,000 The remaining fixed expenses are considered to be corporate-wide expenses that have been allocated to each product line based on sales revenue.
Required:
a. What will be the effect of the decision to discontinue product A on operating income?