Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: If $20,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

Question

Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:  If $20,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

Quizplus · Accepted Answer

By discontinuing the Sporty line, only the variable costs associated with that product line will be eliminated. Therefore, the contribution margin from the Luxury line will remain the same. However, the fixed costs of $20,000 will be eliminated, resulting in an increase in operating income of $10,000 ($30,000 decrease in Sporty line contribution margin minus $20,000 decrease in fixed costs).

Westfall Watches Has Two Product Lines: Luxury Watches and Sporty