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?

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Business

Giovanny Estrada

10 October, 04:42

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?

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Brett Cobb · Answer 1

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