The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows: If Lovely Locks can eliminate fixed costs of $33,000 and increase the sale of Curling Irons by 6500 units at a selling price of $33 per unit and a contribution margin of $11 per unit, then discontinuing the Straighteners should result in which of the following?
A)Decrease in total operating income of $54,500
B)Increase in total operating income of $84,500
C)Increase in total operating income of $54,500
D)Decrease in total operating income of $84,500

Question

The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows:  If Lovely Locks can eliminate fixed costs of $33,000 and increase the sale of Curling Irons by 6500 units at a selling price of $33 per unit and a contribution margin of $11 per unit, then discontinuing the Straighteners should result in which of the following?
A)Decrease in total operating income of $54,500 
B)Increase in total operating income of $84,500 
C)Increase in total operating income of $54,500 
D)Decrease in total operating income of $84,500

Quizplus · Accepted Answer

By discontinuing the Straighteners product line, Lovely Locks can eliminate $103,000 in variable costs ($56,000 + $47,000) and $33,000 in fixed costs, resulting in a total cost savings of $136,000.

With an increase in the sale of Curling Irons by 6,500 units, Lovely Locks will generate an additional contribution margin of $71,500 ($11 contribution margin per unit x 6,500 units x 1 product line).

Therefore, the total increase in operating income will be $207,500 ($71,500 + $136,000), resulting in a higher total operating income of $299,500 compared to the previous operating income of $45,000.

Thus, the correct answer is C) Increase in total operating income of $54,500.

The Income Statement for Lovely Locks Is Divided by Its