Momentum Rollerblades has three product lines-D, E, and F. The following information is available: $$\begin{array} { | l | l | r | r | }
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 70,000 & \$ 40,000 & \$ 31,000 \
\hline \text { Variable costs } & ( 20,000 & \underline { ( 5000 ) } & \underline { ( 11,000 ) } \
\hline \text { Contribution margin } & \$ 50,000 & \$ 35,000 & \$ 20,000 \
\hline \text { Fixed costs } & \underline { ( 10,000 } & \underline { ( 15,000 } & \underline { ( 24,000 ) } \
\hline \text { Operating income (loss) } & \$ 40,000 & \$ 20,000 & \$ ( 4000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss. Assume that $22,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating income?

Question

Momentum Rollerblades has three product lines-D, E, and F. The following information is available: $$\begin{array} { | l | l | r | r | } 
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 70,000 & \$ 40,000 & \$ 31,000 \
\hline \text { Variable costs } & ( 20,000 & \underline { ( 5000 ) } & \underline { ( 11,000 ) } \
\hline \text { Contribution margin } & \$ 50,000 & \$ 35,000 & \$ 20,000 \
\hline \text { Fixed costs } & \underline { ( 10,000 } & \underline { ( 15,000 } & \underline { ( 24,000 ) } \
\hline \text { Operating income (loss) } & \$ 40,000 & \$ 20,000 & \$ ( 4000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss. Assume that $22,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating income?

Quizplus · Accepted Answer

Since the fixed costs of $22,000 would be eliminated by dropping product line F, the operating loss associated with that product line would also be eliminated. However, the contribution margin from the other two product lines (D and E) would remain the same. Therefore, the company's operating income would increase by the amount of the operating loss for product line F ($20,000) minus the fixed costs associated with that product line ($2,000), or $18,000.

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