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 |
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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The income statement for Lovely Locks is divided by its two product lines, Curling Irons and...
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