The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows: $\begin{array}{|l|r|r|r|}
\hline&{\text { Blankets }} &{\text { Pillows }} &{\text { Total }} \
\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \
\hline \text { Variable expenses } & (465,000 & (240,000) & (705,000) \\hline \text { Contribution margin } & \$ 155,000 & \$ 60,000 & \$ 215,000 \
\hline \text { Fixed expenses } & (76,000 & (76,000) & (152,000) \
\hline \text { Operating income (loss) } & \$ 79,000 & \$(16,000) & \$ 63,000 \
\hline
\end{array}$ Sweet Dreams is considering eliminating the pillows product line. If they do so, they will be able to eliminate $76,000 of total fixed costs. How would that business decision impact operating income?

Question

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows: $\begin{array}{|l|r|r|r|} 
\hline&{\text { Blankets }} &{\text { Pillows }} &{\text { Total }} \
\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \
\hline \text { Variable expenses } & (465,000 & (240,000) & (705,000) \\hline \text { Contribution margin } & \$ 155,000 & \$ 60,000 & \$ 215,000 \
\hline \text { Fixed expenses } & (76,000 & (76,000) & (152,000) \
\hline \text { Operating income (loss) } & \$ 79,000 & \$(16,000) & \$ 63,000 \
\hline
\end{array}$ Sweet Dreams is considering eliminating the pillows product line. If they do so, they will be able to eliminate $76,000 of total fixed costs. How would that business decision impact operating income?

Quizplus · Accepted Answer

Eliminating the pillows line would remove its contribution margin of $60,000 but also save $76,000 in fixed costs, resulting in a net increase of $16,000 in operating income.

The Income Statement for Sweet Dreams Company Is Divided by Its