Macaulay Roller Skates Company has three product lines-D,E,and F.The following information is available:
- The company is thinking of dropping product line F because it is reporting an operating loss.Assume that $25,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating income?

Question

Macaulay Roller Skates Company has three product lines-D,E,and F.The following information is available: 
- The company is thinking of dropping product line F because it is reporting an operating loss.Assume that $25,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating income?

Quizplus · Accepted Answer

If the product line F is dropped, the company will save $25,000 in fixed costs. However, since F is currently operating at a loss, the loss amount should be considered. If the loss is $20,000, then eliminating F will save $25,000 in fixed costs but lose $20,000 in operating loss, resulting in a net increase in operating income of $5,000.

Macaulay Roller Skates Company Has Three Product Lines-D,E,and F