Shine Bright Company has three product lines: D, E, and F. The following information is available:
$$\begin{array} { | l | r | r | r | }
\hline & \mathbf { D } & \mathbf { E } & \mathbf { F } \
\hline \text { Sales } & \$ 60,000 & \$ 38,000 & \$ 26,000 \
\hline \text { Variable costs } & 36,000 & 18,000 & 12,000 \
\hline \text { Contribution margin } & 24,000 & 20,000 & 14,000 \
\hline \text { Fixed expenses } & \underline { 12,000 } & \underline { 15,000 } & 16,000 \
\hline \text { Operating income (loss) } & \$ 12,000 & \$ 5,000 & \$ ( 2,000 ) \
\hline
\end{array}$$ Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assuming Shine Bright Company drops line F and is able to double the production and sales of product line E without increasing fixed costs. What effect will this have on operating income?

Question

Shine Bright Company has three product lines: D, E, and F. The following information is available:
$$\begin{array} { | l | r | r | r | } 
\hline & \mathbf { D } & \mathbf { E } & \mathbf { F } \
\hline \text { Sales } & \$ 60,000 & \$ 38,000 & \$ 26,000 \
\hline \text { Variable costs } & 36,000 & 18,000 & 12,000 \
\hline \text { Contribution margin } & 24,000 & 20,000 & 14,000 \
\hline \text { Fixed expenses } & \underline { 12,000 } & \underline { 15,000 } & 16,000 \
\hline \text { Operating income (loss) } & \$ 12,000 & \$ 5,000 & \$ ( 2,000 ) \
\hline
\end{array}$$ Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assuming Shine Bright Company drops line F and is able to double the production and sales of product line E without increasing fixed costs. What effect will this have on operating income?

Quizplus · Accepted Answer

Doubling the production and sales of product line E without increasing fixed costs will result in an additional contribution margin of $20,000 (double the current $20,000) for product line E. Dropping product line F removes the $2,000 operating loss. Therefore, the net increase in operating income is $20,000 (from doubling E) minus the $2,000 loss removed by dropping F, resulting in an $18,000 increase. However, since this specific increase amount is not an option and considering the closest correct interpretation of the provided options, the answer is that operating income will increase, and the closest option provided is A) Operating income will increase $6,000, acknowledging a potential misunderstanding in the calculation process.

Shine Bright Company Has Three Product Lines: D, E, and F