Question

Your Retail Stores accountant prepated the following income statement for the ladiest accessories aroduct Sales Less I Mariable expenses $3,050,000 1.433,500 1,616 500 Contribution margin Less Fored expenses I Wages Insurance on inventory Advertising $1,098,000 61,000 671,000 1 830,000 $ (213,500) Net operating income (loss) Management is concerned about the loss and is considering dropping the product line. If the product line is dropped, a job has to be created elsewhere for a long-term employee currently earning an annual salary of $91,500. Required: Calculate the increase or decrease in the operating income in both alternatives Keep Accesories Product Line Drop Accesories Product Line Sales ficxed expenses Net operating income to

Answer 1

Answer is given below

Advertising cost and insurance on inventory are avoidable cost if product line is dropped

Wages only cost is the cost of employee for whom wages has to be paid till he gets alternative employment

Drop Accessories Product Line Keep Accessories Product Line $3,050,000 $1,433,500 $1,616,500 Sales Variable Cost Contribution Fixed expenses Wages Insurance on Inventory Advertising Net Operating Income (Loss) $91,500 $1,098,000 $61,000 $671,000 $1,830,000 $213,500 $91,500 -$91,500 Conclusion: Operating loss is lower in dropping Accessories product line Hence accessories product line has to be dropped