Karlson Roller Skates has three product lines-D,E,and F.The following information is available: $\begin{array}{|l|r|r|r|}
\hline& \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 80,000 & \$ 50,000 & \$ 31,000 \
\hline \text { Variable costs } & (20,000 & \underline{(5000} & (10,000) \
\hline \text { Contribution margin } & \$ 60,000 & \$ 45,000 & \$ 21,000 \
\hline \text { Fixed costs } & (15,000) & (5000) & (23,000) \
\hline \text { Operating income (loss) } & \$ 45,000 & \$ 40,000 & \$(2000) \
\hline
\end{array}$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Karlson drops product line F and rents the space formerly used to produce product F for $18,000 per year,total operating income will be ________.

Question

Karlson Roller Skates has three product lines-D,E,and F.The following information is available: $\begin{array}{|l|r|r|r|} 
\hline& \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 80,000 & \$ 50,000 & \$ 31,000 \
\hline \text { Variable costs } & (20,000 & \underline{(5000} & (10,000) \
\hline \text { Contribution margin } & \$ 60,000 & \$ 45,000 & \$ 21,000 \
\hline \text { Fixed costs } & (15,000) & (5000) & (23,000) \
\hline \text { Operating income (loss) } & \$ 45,000 & \$ 40,000 & \$(2000) \
\hline
\end{array}$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Karlson drops product line F and rents the space formerly used to produce product F for $18,000 per year,total operating income will be ________.

Quizplus · Accepted Answer

If product line F is dropped, the company loses its contribution margin of $21,000 but gains $18,000 from renting the space. The net effect is a decrease in operating income by $3,000 ($21,000 - $18,000). The current total operating income is $83,000 ($45,000 + $40,000 - $2,000). After dropping F, the total operating income will be $80,000 ($83,000 - $3,000).

Karlson Roller Skates Has Three Product Lines-D,E,and F The Company Is Deciding Whether to Drop Product Line F