Question

Momentum Rollerblades has three product lineslong dash​D, ​E, and F. The following information is​ available: D E F Sales revenue $ 80 comma 000 $ 40 comma 000 $ 30 comma 000 Variable costs ​(20 comma 000​) ​(15 comma 000​) ​(12 comma 000​) Contribution margin $ 60 comma 000 $ 25 comma 000 ​$18 comma 000 Fixed costs ​(15 comma 000​) ​(10 comma 000​) ​(23 comma 000​) Operating income​ (loss) $ 45 comma 000 $ 15 comma 000 ​$(5 comma 000​) The company is deciding whether to drop product line F because it has an operating loss. Assume that $ 21 comma 000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating​ income

Answer 1

Answer:

Increase in Net Operating Income = $3,000

Explanation:

Provided Current Operating income

D = $45,000

E = $15,000

F = ($5,000)

Total operating Income = $55,000

In case product f is dropped then fixed cost of $21,000 will not be incurred.

Total fixed cost of Product F = $23,000

Avoidable fixed cost = $21,000

Fixed cost still to be incurred = $23,000 - $21,000 = $2,000

Net operating Income will arise same for Product D and E, there will be additional fixed cost of $2,000 without product F

Net Operating Income will be

D = $45,000

Add: E = $15,000

Operating Income = $60,000

Less: Fixed Cost = -$2,000

Net Operating Income = $58,000 after dropping product F

Less: Net operating income with product F = $55,000

Increase in Net Operating Income = $3,000