Answer:
Net income will be $352,500 more if the company continues with Luxury watches only.
Explanation:
Since the company discontinues Sporty watches operation, the company's variable cost is decreasing. However, the fixed expenses remain same as the company will use the space for producing Luxury watches. The effect of operating income will be as follows:
Westfall Watch
Income Statement (Contribution Margin approach)
Particulars $
Sales Revenue [$400,000+(400,000 x 250%)] 1,400,000
Less: Variable expenses
[$255,000 + ($255,000 x 250%)] (892,500)
Contribution Margin 507,500
Less: Fixed Cost (80,000)
Net Income 427,500
Therefore, the net income will be $427,500 which is $(427,500 - 75,000) = $352,500 more.
