Karlson Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | r | r | c | }
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 80,000 & \$ 50,000 & \$ 31,000 \
\hline \text { Variable costs } & ( 20,000 ) & ( \underline { 5000 ) } & \underline { ( 10,000 ) } \
\hline \text { Contribution margin } & \$ 60,000 & \$ 45,000 & \$ 21,000 \
\hline \text { Fixed costs } & ( 15,000 ) & ( 5000 ) & ( 23,000 ) \
\hline \text { Operating income (loss) } & \$ 45,000 & \$ 40,000 & \$ ( 2000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Karlson drops product line F and rents the space formerly used to produce product F for $18,000 per year,total operating income will be ________.

Question

Karlson Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | r | r | c | } 
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 80,000 & \$ 50,000 & \$ 31,000 \
\hline \text { Variable costs } & ( 20,000 ) & ( \underline { 5000 ) } & \underline { ( 10,000 ) } \
\hline \text { Contribution margin } & \$ 60,000 & \$ 45,000 & \$ 21,000 \
\hline \text { Fixed costs } & ( 15,000 ) & ( 5000 ) & ( 23,000 ) \
\hline \text { Operating income (loss) } & \$ 45,000 & \$ 40,000 & \$ ( 2000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Karlson drops product line F and rents the space formerly used to produce product F for $18,000 per year,total operating income will be ________.

Quizplus · Accepted Answer

If Karlson drops product line F, it eliminates the operating loss of $2,000, but also loses the contribution margin of $21,000 from product F. Renting the space for $18,000 per year partially offsets this loss. The net effect on operating income is a decrease of $5,000 ($21,000 - $18,000). Since the original total operating income (sum of operating incomes from all product lines) is $85,000 ($45,000 + $40,000 - $2,000), subtracting $5,000 results in a new total operating income of $80,000.

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