The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows:
$$\begin{array} { | l | r | r | r | }
\hline & \text { Blankets } & \text { Pillows } & \text { Total } \
\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \
\hline \text { Variable expenses } & 465,000 & 240,000 & 705,000 \
\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \
\hline \text { Fixed expenses } & 76,000 & 76,000 & 152,000 \
\hline \text { Operating income (loss) } & \$ 79,000 & \$ ( 16,000 ) & \$ 63,000 \
\hline
\end{array}$$ If Sweet Dreams can eliminate fixed costs of $50,000 and increase the sale of blankets by 3,000 units at a selling price of $20 per unit and a contribution margin of $5 per unit, then dropping the pillows should result in which of the following?

Question

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows:
$$\begin{array} { | l | r | r | r | } 
\hline & \text { Blankets } & \text { Pillows } & \text { Total } \
\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \
\hline \text { Variable expenses } & 465,000 & 240,000 & 705,000 \
\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \
\hline \text { Fixed expenses } & 76,000 & 76,000 & 152,000 \
\hline \text { Operating income (loss) } & \$ 79,000 & \$ ( 16,000 ) & \$ 63,000 \
\hline
\end{array}$$ If Sweet Dreams can eliminate fixed costs of $50,000 and increase the sale of blankets by 3,000 units at a selling price of $20 per unit and a contribution margin of $5 per unit, then dropping the pillows should result in which of the following?

Quizplus · Accepted Answer

The elimination of the pillow product line would remove its $16,000 operating loss and $50,000 of fixed costs, improving operating income by $66,000. Selling 3,000 additional blankets at a $5 contribution margin per unit would add $15,000 ($5 * 3,000) to the operating income. However, the removal of the pillow line also eliminates its $60,000 contribution margin. Therefore, the net change in operating income is $66,000 + $15,000 - $60,000 = $21,000. Since the original operating income was $63,000, the new operating income would be $63,000 + $21,000 = $84,000, which is an increase of $21,000, not an option provided. The error in calculation needs to be acknowledged; the correct interpretation based on the provided options and the calculation mistake would suggest an intended answer that might not match the exact calculation. Given the options, the closest to the correct calculation process would be an increase, but none matches the calculated $21,000 increase exactly. The explanation provided was based on the calculation error in interpreting the options. The correct approach shows an increase, but the exact option is misaligned with the calculated outcome.

The Income Statement for Sweet Dreams Company Is Divided by Its