Use the information below to answer the following question(s):
Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:

-If $20,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

Question

Use the information below to answer the following question(s):
Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:
 
-If $20,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

Quizplus · Accepted Answer

From the income statement, we can see that Sporty watches line has a contribution margin of $50,000 ($180,000 - $130,000) and fixed costs of $70,000, which resulted in an operating loss of $20,000. If this line is discontinued, the fixed costs will be reduced by $20,000, and the Luxury watches line will remain with a contribution margin of $80,000 and fixed costs of $40,000, resulting in an operating income of $40,000 ($80,000 - $40,000). Therefore, operating income will increase by $10,000 ($40,000 - $30,000).

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