Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: If $22,000 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 $22,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

Quizplus · Accepted Answer

By eliminating the Sporty line, the company would save $22,000 in fixed costs. However, the Luxury line would still generate $500,000 in revenue and incur $380,000 in variable costs, resulting in a contribution margin of $120,000 ($500,000 - $380,000). 
Without the Sporty line, total fixed costs would be reduced to $120,000 ($142,000 - $22,000). Therefore, the operating income would increase by $12,000 ($120,000 - $108,000).

Westfall Watches Has Two Product Lines: Luxury Watches and Sporty