The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows: If fixed costs remain unchanged and Lovely Locks discontinues the Straightener line, how will operating income change?
A)Will decrease by $200,000
B)Will increase by $50,000
C)Will increase by $200,000
D)Will decrease by $50,000

Question

The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows:  If fixed costs remain unchanged and Lovely Locks discontinues the Straightener line, how will operating income change?
A)Will decrease by $200,000 
B)Will increase by $50,000 
C)Will increase by $200,000 
D)Will decrease by $50,000

Quizplus · Accepted Answer

According to the income statement, the Straightener line generates a loss of $50,000. Therefore, if Lovely Locks discontinues the Straightener line, they will save $50,000 in losses but will also lose the $200,000 contribution margin from the Straightener line. Therefore, operating income will decrease by $50,000.

The Income Statement for Lovely Locks Is Divided by Its