Question

Momentum Rollerblades has three product lines—D, E, and F. The following information is available:

​	D	E	F
Sales revenue	$70,000	$40,000	$31,000
Variable costs	(20,000)	(5000)	(11,000)
Contribution margin	$50,000	$35,000	$20,000
Fixed costs	(10,000)	(15,000)	(24,000)
Operating income (loss)	$40,000	$20,000	$(4000)

The company is deciding whether to drop product line F because it has an operating loss. Assume that $22,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating income?

Select one:

A. Operating income will decrease by $2000.

B. Operating income will increase by $24,000.

C. Operating income will decrease by $24,000.

D. Operating income will increase by $2000.

Answer 1

Increase(Decrease) in operating income

= Avoidable fixed cost - Contribution margin lost

= 22,000 - 20,000

= 2,000

Operating income will increase by 2,000

Option D