Cambridge Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | l | c | c | }
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 70,000 & \$ 50,000 & \$ 30,000 \
\hline \text { Variable costs } & ( 30,000 ) & ( 10,000 ) & ( 12,000 ) \
\hline \text { Contribution margin } & \$ 40,000 & \$ 40,000 & \$ 18,000 \
\hline \text { Fixed costs } & ( 20,000 ) & ( 5,000 ) & \underline { ( 25,000 ) } \
\hline \text { Operating income (loss) } & \$ 20,000 & \$ 35,000 & \$ ( 7,000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assume that $21,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating income?

Question

Cambridge Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | l | c | c | } 
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 70,000 & \$ 50,000 & \$ 30,000 \
\hline \text { Variable costs } & ( 30,000 ) & ( 10,000 ) & ( 12,000 ) \
\hline \text { Contribution margin } & \$ 40,000 & \$ 40,000 & \$ 18,000 \
\hline \text { Fixed costs } & ( 20,000 ) & ( 5,000 ) & \underline { ( 25,000 ) } \
\hline \text { Operating income (loss) } & \$ 20,000 & \$ 35,000 & \$ ( 7,000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assume that $21,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating income?

Quizplus · Accepted Answer

If product line F is dropped, the company will save $21,000 in fixed costs but lose the $18,000 contribution margin from F. The net effect on operating income will be an increase of $3,000 ($21,000 - $18,000).

Cambridge Roller Skates Has Three Product Lines-D,E,and F The Company Is Deciding Whether to Drop Product Line F