The income statement for Slumber Company is divided by its two product lines,blankets and pillows,as follows: $$\begin{array} { | l | r | r | r | }
\hline & { \text { Blankets } } &{ \text { Pillows } } & \text { Total } \
\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \
\hline \text { Variable costs } & ( 455,000 ) & ( 241,000 ) & ( 696,000 ) \
\hline \text { Contribution margin } & \$ 165,000 & \$ 59,000 & \$ 224,000 \
\hline \text { Fixed costs } & ( 74,000 & \underline { ( 74,000 ) } & ( 148,000 ) \
\hline \text { Operating income (loss) } & \$ 91,000 & \$ ( 15,000 ) & \$ 76,000 \
\hline
\end{array}$$ Slumber is considering eliminating the pillows product line.If this line is eliminated,Slumber will be able to eliminate $74,000 of total fixed costs.How would this business decision impact operating income?

Question

The income statement for Slumber Company is divided by its two product lines,blankets and pillows,as follows: $$\begin{array} { | l | r | r | r | } 
\hline & { \text { Blankets } } &{ \text { Pillows } } & \text { Total } \
\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \
\hline \text { Variable costs } & ( 455,000 ) & ( 241,000 ) & ( 696,000 ) \
\hline \text { Contribution margin } & \$ 165,000 & \$ 59,000 & \$ 224,000 \
\hline \text { Fixed costs } & ( 74,000 & \underline { ( 74,000 ) } & ( 148,000 ) \
\hline \text { Operating income (loss) } & \$ 91,000 & \$ ( 15,000 ) & \$ 76,000 \
\hline
\end{array}$$ Slumber is considering eliminating the pillows product line.If this line is eliminated,Slumber will be able to eliminate $74,000 of total fixed costs.How would this business decision impact operating income?

Quizplus · Accepted Answer

Eliminating the pillows line would remove its $59,000 contribution margin but also remove $74,000 in fixed costs, resulting in a net increase in operating income of $15,000 ($74,000 - $59,000).

The Income Statement for Slumber Company Is Divided by Its