Karlson Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | l | c | c | }
\hline & \mathrm { D } & \mathrm { E } & \mathrm { F } \
\hline \text { Sales revenue } & \$ 90,000 & \$ 60,000 & \$ 30,000 \\
\hline \text { Variable costs } & \underline { ( 30,000 } & \underline { ( 15,000 } ) & \underline { ( 12,000 } ) \\
\hline \text { Contribution margin } & \$ 60,000 & \$ 45,000 & \$ 18,000 \\
\hline \text { Fixed costs } & \underline { ( 20,000 } & \underline { ( 15,000 } ) & \underline { ( 23,000 } ) \\
\hline \text { Operating income (loss) } & \underline { \$ 40,000} & \underline { \$ 30,000} & \underline { \$ ( 5000 )} \\
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Karlson drops product line F and rents the space formerly used to produce product F for $20,000 per year,total operating income will be ________.

Question

Karlson Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | l | c | c | } 
\hline & \mathrm { D } & \mathrm { E } & \mathrm { F } \
\hline \text { Sales revenue } & \$ 90,000 & \$ 60,000 & \$ 30,000 \\
\hline \text { Variable costs } & \underline { ( 30,000 } & \underline { ( 15,000 } ) & \underline { ( 12,000 } ) \\
\hline \text { Contribution margin } & \$ 60,000 & \$ 45,000 & \$ 18,000 \\
\hline \text { Fixed costs } & \underline { ( 20,000 } & \underline { ( 15,000 } ) & \underline { ( 23,000 } ) \\
\hline \text { Operating income (loss) } & \underline { \$ 40,000} & \underline { \$ 30,000} & \underline { \$ ( 5000 )} \\
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Karlson drops product line F and rents the space formerly used to produce product F for $20,000 per year,total operating income will be ________.

Quizplus · Accepted Answer

To find the total operating income, we need to calculate the contribution margin for each product line:
Contribution Margin = Revenue - Variable Costs

For product line F, we know it has an operating loss, which means the variable costs are greater than the revenue. Therefore, the contribution margin for F is negative.

For product line E, the contribution margin is:
$240,000 - $120,000 - $40,000 = $80,000

For product line D, the contribution margin is:
$300,000 - $150,000 - $60,000 = $90,000

The total contribution margin for all three product lines is:
$80,000 + $90,000 - $20,000 = $150,000

If Karlson drops product line F and rents the space for $20,000 per year, the fixed costs will remain the same, but the total revenue will decrease by the revenue from product line F. Therefore, the new total operating income will be:
$150,000 - $60,000 - $20,000 = $70,000

However, we are only interested in the operating income without product line F, so the answer is:
$70,000 + $23,000 (contribution margin for product line F) - $20,000 (rental income) = $67,000

Therefore, the best choice is B.

Karlson Roller Skates Has Three Product Lines-D,E,and F The Company Is Deciding Whether to Drop Product Line F