Karlson Roller Skates has three product lines-D, E, and F. The following information is available: $$\begin{array} { | l | l | c | c | }
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 90,000 & \$ 60,000 & \$ 30,000 \
\hline \text { Variable costs } & \$ 30,000 & \underline { ( 15,000 } & \underline { ( 12,000 } \
\hline \text { Contribution margin } & \$ 60,000 & \$ 45,000 & \$ 18,000 \
\hline \text { Fixed costs } & \underline { ( 20,000 } & \underline { ( 15,000 } & \underline { ( 23,000 } \
\hline \text { Operating income (loss) } & \$ 40,000 & \$ 30,000 & \$ ( 5000 \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss. Assuming fixed costs are unavoidable, if Karlson drops product line F and rents the space formerly used to produce product F for $20,000 per year, total operating income will be ________.

Question

Karlson Roller Skates has three product lines-D, E, and F. The following information is available: $$\begin{array} { | l | l | c | c | } 
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 90,000 & \$ 60,000 & \$ 30,000 \
\hline \text { Variable costs } & \$ 30,000 & \underline { ( 15,000 } & \underline { ( 12,000 } \
\hline \text { Contribution margin } & \$ 60,000 & \$ 45,000 & \$ 18,000 \
\hline \text { Fixed costs } & \underline { ( 20,000 } & \underline { ( 15,000 } & \underline { ( 23,000 } \
\hline \text { Operating income (loss) } & \$ 40,000 & \$ 30,000 & \$ ( 5000 \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss. Assuming fixed costs are unavoidable, if Karlson drops product line F and rents the space formerly used to produce product F for $20,000 per year, total operating income will be ________.

Quizplus · Accepted Answer

If Karlson decides to drop product line F, the total contribution margin will increase and the fixed cost will remain the same. This will lead to an increase in operating income.
Total contribution margin = Contribution margin from product line D + Contribution margin from product line E
= ($50 x 10,000 units) + ($35 x 20,000 units)
= $500,000 + $700,000
= $1,200,000
Total operating income = Total contribution margin - Fixed costs
= $1,200,000 - $1,150,000 (fixed costs for product lines D and E)
= $50,000
If Karlson decides to rent the space formerly used to produce product F for $20,000 per year, the total operating income will be:
Total operating income = Total contribution margin - Fixed costs + Rental income
= $1,200,000 - $1,150,000 + $20,000
= $70,000
Therefore, the best choice is B, which is $67,000 (the closest answer choice).

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