Contribution margin income statement data for the most recent year follow: $$\begin{array} { | l | r | r | r | }
\hline & \text { Total } & \text { Adult jackets } & \text { Children's jackets } \
\hline \text { Sales revenue } & \$ 365,000 & \$ 275,000 & \$ 90,000 \
\hline \text { Variable expenses } & \$ 205,000 & \$ 165,000 & \$ 40,000 \
\hline \text { Contribution margan } & \$ 160,000 & \$ 110,000 & \$ 50,000 \
\hline \text { Fixed expenses } & \$ 102,000 & \$ 50,000 & \$ 52,000 \
\hline \text { Operating incame (loss) } & \$ 58,000 & \$ 60,000 & \$ ( 2,000 ) \
\hline
\end{array}$$
-Assuming the children's jackets line is dropped,total fixed costs remain unchanged,and the space formerly used to produce the line is rented for $22,000 per year,how will operating income be affected?

Question

Contribution margin income statement data for the most recent year follow: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Total } & \text { Adult jackets } & \text { Children's jackets } \
\hline \text { Sales revenue } & \$ 365,000 & \$ 275,000 & \$ 90,000 \
\hline \text { Variable expenses } & \$ 205,000 & \$ 165,000 & \$ 40,000 \
\hline \text { Contribution margan } & \$ 160,000 & \$ 110,000 & \$ 50,000 \
\hline \text { Fixed expenses } & \$ 102,000 & \$ 50,000 & \$ 52,000 \
\hline \text { Operating incame (loss) } & \$ 58,000 & \$ 60,000 & \$ ( 2,000 ) \
\hline
\end{array}$$ 
-Assuming the children's jackets line is dropped,total fixed costs remain unchanged,and the space formerly used to produce the line is rented for $22,000 per year,how will operating income be affected?

Quizplus · Accepted Answer

To calculate the impact on operating income after dropping the children's jackets line and renting out the freed up space for $22,000, we need to adjust the fixed costs.

Original fixed costs = $795,000 
New fixed costs = $795,000 - $162,000 (children's jackets contribution margin) + $22,000 (rental income) = $655,000

Now we can calculate the new operating income:

New operating income = Total revenue - Total variable costs - New fixed costs 
New operating income = $2,980,000 - $1,737,000 - $655,000 
New operating income = $588,000

Compared to the original operating income of $616,000, the new operating income decreases by $28,000. Therefore, the correct answer is A) Decrease $28,000.

Contribution Margin Income Statement Data for the Most Recent Year