Pottery Unlimited has two product lines: cups and pitchers.Income statement data for the most recent year follow:
- If $20,000 of fixed costs will be eliminated by dropping the Pitcher line,how will operating income be affected?

Question

Pottery Unlimited has two product lines: cups and pitchers.Income statement data for the most recent year follow: 
- If $20,000 of fixed costs will be eliminated by dropping the Pitcher line,how will operating income be affected?

Quizplus · Accepted Answer

The contribution margin for Pitchers is $5 per unit ($30 selling price - $25 variable cost), while the contribution margin for Cups is $8 per unit ($10 selling price - $2 variable cost). 
With 20,000 fewer fixed costs, operating income would be affected in the following way: 
Operating Income before dropping the Pitcher line = $84,000 - $32,000 = $52,000 
Operating Income after dropping the Pitcher line = $64,000 - $12,000 = $52,000 
Therefore, dropping the Pitcher line would decrease operating income by $10,000 ($52,000 - $42,000). Choice C is the correct answer.

Pottery Unlimited Has Two Product Lines: Cups and Pitchers