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 comma 000 $ 360 comma 000 $130,000 Variable expenses 355 comma 000 235 comma 000 120,000 Contribution margin 135 comma 000 125 comma 000 10,000 Fixed expenses 78 comma 000 39 comma 000 39 comma 000 Operating income (loss) $ 57 comma 000 $ 86 comma 000 $ (29 comma 000 ) If $ 23 comma 000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

Question

Business

Jonas Carlson

28 June, 18:59

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 comma 000 $ 360 comma 000 $130,000 Variable expenses 355 comma 000 235 comma 000 120,000 Contribution margin 135 comma 000 125 comma 000 10,000 Fixed expenses 78 comma 000 39 comma 000 39 comma 000 Operating income (loss) $ 57 comma 000 $ 86 comma 000 $ (29 comma 000 ) If $ 23 comma 000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

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Janet Maynard · Answer 1

The operating income will increase by $13,000.

Explanation:

Giving the following information:

Sales revenue

Total = $490,000

Luxury = $360,000

Sporty = $130,000

Variable expenses:

Total = $355,000

Luxury = $235,000

Sporty = $ 120,000

Contribution margin

Total = $135,000

Luxury = $125,000

Sporty = $ 10,000

Fixed expenses:

Total = $78,000

Luxury = $39,000

Sporty = $39,000

Operating income (loss):

Total = $57,000

Luxury = $86,000

Sporty = $ (29,000 )

New Income Statement:

Sales = 360,000

Variable costs = 235,000 (-)

Contribution margin = 125,000

Fixed costs = 39,000 + 16,000 = 55,000

Operating income = 70,000

The operating income will increase by $13,000.