The income statement for Eideldown, Inc. is divided by its two product lines, blankets and pillows, as follows:
$$\begin{array} { | l | r | r | r | }
\hline & { \text { Blankets } } & { \text { Pillows } } & { \text { Total } } \
\hline \text { Sales revenue } & \$ 900,000 & \$ 600,000 & \$ 1,500,000 \
\hline \text { Variable costs } & \underline { 350,000 } & \underline { 230,000 } & \underline { 580,000 } \
\hline \text { Contribution margin } & 550,000 & 370,000 & 920,000 \
\hline \text { Fixed costs } & \underline { 65,000 } & \underline { 75,000 } & \underline { 140,000 } \
\hline \text { Operating income (loss) } & \$ 485,000 & \$ 295,000 & \$ 780,000 \
\hline
\end{array}$$ If total fixed costs remain unchanged and Eideldown, Inc. drops the pillows line, operating income will decrease by $370,000.

Question

The income statement for Eideldown, Inc. is divided by its two product lines, blankets and pillows, as follows:
 $$\begin{array} { | l | r | r | r | } 
\hline &  { \text { Blankets } } & { \text { Pillows } } & { \text { Total } } \
\hline \text { Sales revenue } & \$ 900,000 & \$ 600,000 & \$ 1,500,000 \
\hline \text { Variable costs } & \underline { 350,000 } & \underline { 230,000 } & \underline { 580,000 } \
\hline \text { Contribution margin } & 550,000 & 370,000 & 920,000 \
\hline \text { Fixed costs } & \underline { 65,000 } & \underline { 75,000 } & \underline { 140,000 } \
\hline \text { Operating income (loss) } & \$ 485,000 & \$ 295,000 & \$ 780,000 \
\hline
\end{array}$$ If total fixed costs remain unchanged and Eideldown, Inc. drops the pillows line, operating income will decrease by $370,000.

Quizplus · Accepted Answer

Since operating income will decrease by $370,000, dropping the pillows line must be generating more than $370,000 in operating income. Therefore, if they drop the pillows line, they will be losing the operating income from that line, resulting in a decrease in total operating income. This indicates that pillows were generating more income than their fixed costs, and dropping the line would lead to a decrease in total operating income.

The Income Statement for Eideldown, Inc If Total Fixed Costs Remain Unchanged and Eideldown, Inc