The income statement for Bedtime Company is divided by its two product lines,blankets and pillows,as follows: $$\begin{array} { | l | r | r | r | }
\hline &{ \text { Blankets } } & \text { Pillows } & \text { Total } \
\hline \text { Sales revenue } & \$ 640,000 & \$ 298,000 & \$ 938,000 \
\hline \text { Variable costs } & ( 465,000 ) & ( 242,000 ) & ( 707,000 ) \
\hline \text { Contribution margin } & \$ 175,000 & \$ 56,000 & \$ 231,000 \
\hline \text { Fixed costs } & ( 74,000) & \underline { ( 74,000 ) } & ( 148,000 ) \
\hline \text { Operating income (loss) } & \$ 101,000 & \$ ( 18,000 ) & \$ 83,000 \
\hline
\end{array}$$ Bedtime is considering eliminating the pillows product line.If this line is eliminated,Bedtime will be able to eliminate $72,000 of total fixed costs.How would this business decision impact operating income?

Question

The income statement for Bedtime Company is divided by its two product lines,blankets and pillows,as follows: $$\begin{array} { | l | r | r | r | } 
\hline &{ \text { Blankets } } & \text { Pillows } & \text { Total } \
\hline \text { Sales revenue } & \$ 640,000 & \$ 298,000 & \$ 938,000 \
\hline \text { Variable costs } & ( 465,000 ) & ( 242,000 ) & ( 707,000 ) \
\hline \text { Contribution margin } & \$ 175,000 & \$ 56,000 & \$ 231,000 \
\hline \text { Fixed costs } & ( 74,000) & \underline { ( 74,000 ) } & ( 148,000 ) \
\hline \text { Operating income (loss) } & \$ 101,000 & \$ ( 18,000 ) & \$  83,000 \
\hline
\end{array}$$ Bedtime is considering eliminating the pillows product line.If this line is eliminated,Bedtime will be able to eliminate $72,000 of total fixed costs.How would this business decision impact operating income?

Quizplus · Accepted Answer

Eliminating the pillows line would remove its contribution margin of $56,000 but also remove $72,000 of fixed costs, resulting in a net increase in operating income of $16,000 ($72,000 - $56,000).

The Income Statement for Bedtime Company Is Divided by Its