Question

Westfall Watches has two product​ lines: Luxury watches and Sporty watches. Income statement data for the most recent year​ follow: Total Luxury Sporty Sales revenue ​$490,000 ​$360,000 ​$130,000 Variable expenses 353 comma 000 ​235,000 118 comma 000 Contribution margin 137 comma 000 ​125,000 12 comma 000 Fixed expenses ​76,000 ​38,000 ​38,000 Operating income​ (loss) $ 61 comma 000 ​$87,000 $( 26 comma 000 ) Assuming fixed costs remain​ unchanged, how would discontinuing the Sporty line affect operating​ income?

Answer 1

Answer:

New operating income= -$38,000

Explanation:

Giving the following information:

Sporty

Sales revenue= $130,000

Variable expenses= ($118,000)

Contribution margin= 12,000

Fixed expenses= (​38,000)

Operating income​= (26,000)

The general rule is that as long as the contribution margin is positive, in the short term the product line should continue. We will prove this.

Because none of the fixed costs are evitable, the effect on income will be the increase in the influence of the fixed costs on income.

Effect on income= -positive contribution margin

Effect on income= -$12,000

New operating income= -26,000 - 12,000= -$38,000