Complete Question:
The income statement for Slumber Company is divided by its two product lines, blankets and pillows, as follows:
Narrative Blanket Pillow Total
Revenue $620,000 $300,000 $920,000
Variable cost ($455,000) ($241,000) ($696,000)
Contribution $165,000 $59,000 $224,000
Fixed cost ($74,000) ($74,000) ($148,000)
Operating Income $91,000 ($15,000) $76,000
Slumber is considering eliminating the pillows product line. If this line is eliminated, Slumber will be able to eliminate $74,000 of total fixed costs. How would this business decision impact operating income?
A. increase of $15,000 in operating income
B. increase of $133,000 in operating income
C. increase of $74,000 in operating income
D. decrease of $59,000 in operating income
Answer:
A. increase of $15,000 in operating income
Explanation:
We can see that if the we continue both product line then the profit is $76k which is lower than the profit of $91k generated from continuing Blankets product line only. If we abandon the pillow production then the loss that pillow manufacturing is producing will be totally eliminated which is $15k. The reason is that fixed cost is specific fixed cost which means it can be eliminated if the company abandons the production of pillow product line. Hence the operating income will increase by $15,000 ($91k - $76k). Option A is correct here.
