Macaulay Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | c | c | c | }
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 80,000 & \$ 40,000 & \$ 31,000 \
\hline \text { Variable costs } & ( 40,000 ) & ( 10,000 ) & ( 12,000 ) \
\hline \text { Contribution margin } & \$ 40,000 & \$ 30,000 & \$ 19,000 \
\hline \text { Fixed costs } & ( 20,000 ) & ( 10,000 ) & ( 25,000 ) \
\hline \text { Operating income (loss) } & \$ 20,000 & \$ 20,000 & \$ ( 6,000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Macaulay drops product line F and does not replace it,what effect will this have on operating income?

Question

Macaulay Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | c | c | c | } 
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 80,000 & \$ 40,000 & \$ 31,000 \
\hline \text { Variable costs } & ( 40,000 ) & ( 10,000 ) & ( 12,000 ) \
\hline \text { Contribution margin } & \$ 40,000 & \$ 30,000 & \$ 19,000 \
\hline \text { Fixed costs } & ( 20,000 ) & ( 10,000 ) & ( 25,000 ) \
\hline \text { Operating income (loss) } & \$ 20,000 & \$ 20,000 & \$ ( 6,000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Macaulay 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 $19,000, but since the fixed costs of $25,000 are unavoidable and will not be saved by dropping the product, the operating income will decrease by the amount of the contribution margin, which is $19,000.

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