Question

Momentum Rollerblades has three product lines: D, E, and F. The following information is available:

Answer 1

Answer:

Operating income will increase by $16,000. This is not given as one of the options.

Explanation:

The difference between the sales and variable expense gives the contribution margin. The contribution margin net the fixed cost gives the operating income or loss.

                                                     D                         E                    F

Sales revenue                            $90,000        $40,000        $30,000

Variable costs                            ($40,000)      ($10,000)       ($10,000)

Contribution margin                   $50,000        $30,000        $20,000

Fixed costs                                 ($10,000)       ($5,000)       ($25,000)

Operating income (loss)             $40,000         $25,000       ($5,000)

The total operating income is

= $40,000 + $25,000 + ($5,000)

= $60,000

Should the fixed costs of F be eliminated, the operating income/(loss) of F

= $21,000 - $5,000

= $16,000

This is the net increase in the total operating income.