Question

Your Retail Store's accountant prepared the following income statement for the ladies' bocessories Product line: Sales Less Variable expenses $3,000,000 1.410,000 1590,000 Contribution margin Less: Fixed expenses Wages Insurance on inventory Advertising $1,080,000 60.000 650,000 1,800,000 $ 210,000) 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 $90 000. Required: Calculate the increase or decrease in the operating income in both alternatives Keep Accesories Product Line Drop Accesories Product Line Sales Fixed expenses Net operating income (loss)

Answer 1

COMMENT BELOW IF YOU HAVE ANY DOUBT

STATEMENT TO DETERMINE INCREASE (DECREASE) IN NET OPERATING INCOME (ALL AMOUNT IN $) DROP ACCESSORIES PRODUCT LINE KEEP ACCESSORIES PRODUCT LINE 3000000 1410000 1590000 SALES LESS: VARIABLE EXPENSES CONTRIBUTION MARGIN FIXED EXPENSES: LESS: WAGES EXPENSES LESS: INSURANCE ON INVENTORY EXPENSES LESS: ADVERTISING EXPENSES NET OPERATING INCOME(LOSS) 90000 1080000 60000 660000 0 1800000 -210000 90000 -90000 FROM THE ABOVE, WE CAN SAY THAT IT WILL BE BENEFICIAL TO DROP THE ACCESSORIES PRODUCT LINE DROPING THE ACCESSORIES PRODUCT LINE WILL LEADS TO INCREASE IN OPERATING INCOME OF $ 110,000 ( 210,000-90,000) ASSUMPTION : WE ASSUME THAT ALL OTHER FIXED COST (SUCH AS INSURANCE AND ADVERTISING EXPENSES) ARE DEEMED TO BE AVOIDABLE COST FOR COMPARISON