Accelerate Rollerblades has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | l | r | c | }
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 90,000 & \$ 60,000 & \$ 31,000 \
\hline \text { Variable costs } & ( 20,000 ) & ( 15,000 ) & ( 11,000 ) \
\hline \text { Contribution margin } & \$ 70,000 & \$ 45,000 & \$ 20,000 \
\hline \text { Fixed costs } & ( 20,000 ) & ( 5000 ) & ( 24,000 ) \
\hline \text { Operating income (loss) } & \$ 50,000 & \$ 40,000 & \$ ( 4000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assume that $15,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating income?

Question

Accelerate Rollerblades has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | l | r | c | } 
\hline & \text { D } & \text { E } & \text { F } \
\hline \text { Sales revenue } & \$ 90,000 & \$ 60,000 & \$ 31,000 \
\hline \text { Variable costs } & ( 20,000 ) & ( 15,000 ) & ( 11,000 ) \
\hline \text { Contribution margin } & \$ 70,000 & \$ 45,000 & \$ 20,000 \
\hline \text { Fixed costs } & ( 20,000 ) & ( 5000 ) & ( 24,000 ) \
\hline \text { Operating income (loss) } & \$ 50,000 & \$ 40,000 & \$ ( 4000 ) \
\hline
\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assume that $15,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating income?

Quizplus · Accepted Answer

Dropping product line F would eliminate its operating loss of $4,000, but it would also remove $15,000 of fixed costs that could be eliminated. The net effect is a decrease in operating income of $5,000 ($4,000 loss avoided minus $15,000 in fixed costs that could no longer be eliminated).

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