Motion Rollerblades has three product lines-D,E,and F.The following information is available: $\begin{array}{|l|l|l|l|}
\hline& \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 90,000 & \$ 50,000 & \$ 31,000 \\hline \text { Variable costs } & (40,000) & \$ 15,000 & \$ 12,000) \
\hline \text { Contribution margin } & \$ 50,000 & \$ 35,000 & \$ 19,000 \
\hline \text { Fixed costs } & (15,000) & \$ 10,000 & ( 23,000) \
\hline \text { Operating income (loss) } & \$ 35,000 & \$ 25,000 & \$(4000) \
\hline
\end{array}$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Motion drops product line F and does not replace it,what effect will this have on operating income?

Question

Motion Rollerblades has three product lines-D,E,and F.The following information is available: $\begin{array}{|l|l|l|l|} 
\hline& \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 90,000 & \$ 50,000 & \$ 31,000 \\hline \text { Variable costs } & (40,000) & \$ 15,000 & \$ 12,000) \
\hline \text { Contribution margin } & \$ 50,000 & \$ 35,000 & \$ 19,000 \
\hline \text { Fixed costs } & (15,000) & \$ 10,000 & ( 23,000) \
\hline \text { Operating income (loss) } & \$ 35,000 & \$ 25,000 & \$(4000) \
\hline
\end{array}$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Motion drops product line F and does not replace it,what effect will this have on operating income?

Quizplus · Accepted Answer

Dropping product line F will result in a decrease in operating income by $19,000, which is the contribution margin that F provides. Fixed costs are unavoidable, so they will remain, and the loss of contribution margin will negatively impact the overall operating income.

Motion Rollerblades Has Three Product Lines-D,E,and F The Company Is Deciding Whether to Drop Product Line F