Question

Powder, Inc. has two product lines snow skis and water skis. The income statement data for the most recent year is as follows:

	Total	Snow skis	Water skis
Sales revenue	$980,000	$650,000	$330,000
Variable costs	(425,000)	(175,000)	(250,000)
Contribution margin	$555,000	$475,000	$80,000
Fixed costs	(185,000)	(80,000)	(105,000)
Operating income (loss)	$370,000	$395,000	$(25,000)

Question: What is the effect of dropping the water skis line on the operating income of the company assuming no changes in fixed costs?

		Operating income will increase by $25,000.
		Operating income will increase by $80,000.
		Operating income will decrease by $80,000.
		Operating income will decrease by $25,000

Answer 1

Answer is c

Operating income will decrease by 80000$

Reason

At present company is earning 370000$

If we discontinue water skis

Contribution of snow skis Remain $475000 but fixed cost will be 185000$ and operating profit will be 290000$

Therefore 370000 - 290000 = 80000$ ans it will decrease by 80000