Motion Rollerblades has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | c | c | c | }
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 90,000 & \$ 50,000 & \$ 31,000 \
\hline \text { Variable costs } & ( 40,000 ) & ( 15,000 ) & ( 12,000 ) \
\hline \text { Contribution margin } & \$ 50,000 & \$ 35,000 & \$ 19,000 \
\hline \text { Fixed costs } & ( 15,000 & \underline { ( 10,000 ) } & \underline { ( 23,000 ) } \
\hline \text { Operating income (loss) } & \$ 35,000 & \$ 25,000 & \$ ( 4000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Motion drops product line F and does not replace it,what effect will this have on operating income?

Question

Motion Rollerblades has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | c | c | c | } 
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 90,000 & \$ 50,000 & \$ 31,000 \
\hline \text { Variable costs } & ( 40,000 ) & ( 15,000 ) & ( 12,000 ) \
\hline \text { Contribution margin } & \$ 50,000 & \$ 35,000 & \$ 19,000 \
\hline \text { Fixed costs } & ( 15,000 & \underline { ( 10,000 ) } & \underline { ( 23,000 ) } \
\hline \text { Operating income (loss) } & \$ 35,000 & \$ 25,000 & \$ ( 4000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Motion drops product line F and does not replace it,what effect will this have on operating income?

Quizplus · Accepted Answer

Since the fixed costs of $23,000 for product line F are unavoidable, dropping product line F will eliminate its contribution margin of $19,000 without reducing any fixed costs, thus decreasing overall operating income by $19,000.

Motion Rollerblades Has Three Product Lines-D,E,and F The Company Is Deciding Whether to Drop Product Line F