Iver Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | c | c | c | }
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 80,000 & \$ 50,000 & \$ 30,000 \
\hline \text { Variable costs } & \$ ( 40,000 ) & ( 15,000 ) & ( 10,000 ) \
\hline \text { Contribution margin } & \$ 40,000 & \$ 35,000 & \$ 20,000 \
\hline \text { Fixed costs } & \$ 10,000 & \underline { ( 15,000 ) } & \underline { ( 25,000 ) } \
\hline \text { Operating income (loss) } & \$ 30,000 & \$ 20,000 & \$ ( 5,000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Iver drops product line F and rents the space formerly used to produce product F for $17,000 per year,total income will be ________.

Question

Iver Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | c | c | c | } 
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 80,000 & \$ 50,000 & \$ 30,000 \
\hline \text { Variable costs } & \$ ( 40,000 ) & ( 15,000 ) & ( 10,000 ) \
\hline \text { Contribution margin } & \$ 40,000 & \$ 35,000 & \$ 20,000 \
\hline \text { Fixed costs } & \$ 10,000 & \underline { ( 15,000 ) } & \underline { ( 25,000 ) } \
\hline \text { Operating income (loss) } & \$ 30,000 & \$ 20,000 & \$ ( 5,000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Iver drops product line F and rents the space formerly used to produce product F for $17,000 per year,total income will be ________.

Quizplus · Accepted Answer

Renting the space formerly used for product F adds $17,000 to the income. Since the fixed costs are unavoidable, dropping product F removes its contribution margin of $20,000 but does not reduce fixed costs. Therefore, the total income decreases by $3,000 ($20,000 - $17,000) from the original total operating income of $45,000 ($30,000 + $20,000 - $5,000), resulting in $42,000.

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