Question

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?

Answer 1

Answer:

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.