Motion Rollerblades has three product lines-D, E, and F. The following information is available: $\begin{array}{|l|l|l|l|}
\hline& \mathrm{D} & \mathrm{E} & \mathrm{F} \
\hline \text { Sales revenue } & \$ 90,000 & \$ 40,000 & \$ 31,000 \
\hline \text { Variable costs } & (40,000) & (15,000) & (10,000) \
\hline \text { Contribution margin } & \$ 50,000 & \$ 25,000 & \$ 21,000 \
\hline \text { Fixed costs } & (20,000) & (15,000) & \underline{(23,000)} \
\hline \text { Operating income (loss) } & \$ 30,000 & \$ 10,000 & \$(200) \
\hline
\end{array}$
The company is deciding whether to drop product line F because it has an operating loss. Assuming fixed costs are unavoidable, if Motion drops product line F and does not replace it, what effect will this have on operating income?

Question

Motion Rollerblades has three product lines-D, E, and F. The following information is available: $\begin{array}{|l|l|l|l|} 
\hline& \mathrm{D} & \mathrm{E} & \mathrm{F} \
\hline \text { Sales revenue } & \$ 90,000 & \$ 40,000 & \$ 31,000 \
\hline \text { Variable costs } & (40,000) & (15,000) & (10,000) \
\hline \text { Contribution margin } & \$ 50,000 & \$ 25,000 & \$ 21,000 \
\hline \text { Fixed costs } & (20,000) & (15,000) & \underline{(23,000)} \
\hline \text { Operating income (loss) } & \$ 30,000 & \$ 10,000 & \$(200) \
\hline
\end{array}$
 The company is deciding whether to drop product line F because it has an operating loss. Assuming fixed costs are unavoidable, if Motion drops product line F and does not replace it, what effect will this have on operating income?

Quizplus · Accepted Answer

Dropping product line F will remove its contribution margin of $21,000 from the overall operating income. Since the fixed costs of $23,000 are unavoidable and will not be saved by dropping the product line, the net effect is a decrease in operating income by the amount of the contribution margin, which is $21,000.

Motion Rollerblades Has Three Product Lines-D, E, and F The Company Is Deciding Whether to Drop Product Line F