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

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 company is deciding whether to drop product line F because it has an operating loss. Assume that $21,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating income?

A. Operating income will decrease by $2000.

B. Operating income will increase by $24,000.

C. Operating income will decrease by $24,000.

D. Operating income will increase by $2000.

Question

Business

Devyn Sanford

31 December, 05:14

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

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 company is deciding whether to drop product line F because it has an operating loss. Assume that $21,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating income?

A. Operating income will decrease by $2000.

B. Operating income will increase by $24,000.

C. Operating income will decrease by $24,000.

D. Operating income will increase by $2000.

+2

Answers (1)

Know the Answer?

Reynaldo Lambert · Answer 1

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.