Question

The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows:

​	Curling Irons	Straighteners	Total
Sales revenue	$650,000	$260,000	$910,000
Variable expenses	$490,000	$210,000	$700,000
Contribution margin	$160,000	$50,000	$210,000
Fixed expenses	$90,000	$90,000	$180,000
Operating income (loss)	$70,000	-$40,000	$30,000

If Lovely Locks can eliminate fixed costs of $33,000 and increase the sale of Curling Irons by 6500 units at a selling price of $33 per unit and a contribution margin of $11 per unit, then discontinuing the Straighteners should result in which of the following?

		Decrease in total operating income of $54,500
		Increase in total operating income of $84,500
		Decrease in total operating income of $84,500
		Increase in total operating income of $54,500

Answer 1

If Straighteners is discontinued, fixed expenses will decrease by $33,000.

Fixed expenses after elimination of  Straighteners = 180,000 - 33,000

= $147,000

Sale of Curling Irons will increase by 6,500 units, generating a contribution margin of $11 per unit.

Increase in contribution margin of Curling Irons = 6,500 x 11

= $71,500

Income statement after elimination of  Straighteners

contribution margin (160,000 + 71,500)	231,500
Fixed expenses	- 147,000
Operating income	$84,500

Increase in operating income = 84,500 - 30,000

= $54,500

Fourth option is the correct option i.e. Increase in total operating income of $54,500

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