Question

Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow. Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $500,000 395,000 105,000 76,000 $29,000 Hiking $360,000 275,000 85,000 38,000 $47.000 Fashion $140,000 120,000 20,000 38,000 $(18,000) If $25,000 of fixed costs will be eliminated by discontinuing the Fashion line, how will operating income be affected? O A. Increase $65,000 OB. Increase $36,000 OC. Increase $5,000 OD. Decrease $45,000

Answer 1

Fashion product line loss = -S18,000 Fixed costs $38,000 Here company wants to discontinue the operations of Fashion product line , and fixed costs of $25,000 eliminated. Net fixed cost borne by company = S38,000 - $25,000 = $13,000 Total operating income of Boots plus = $29,000 Net operating income after discontinuing operations of Fashion product line = Operating income of Hiking department - Fixed costs borne by company of eliminated firm = $47,000 - $13,000 = $34,000 Change in operating income due to discontinue of operations of fashion department = $29,000 $34,000 = $5,000 (Increase Ans : Increase by S5,000