Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:
Total Luxury Sporty
Sales revenue $490,000 $360,000 $130,000
Variable expenses 355,000 235,000 120,000
Contribution margin 135,000 125,000 10,000
Fixed expenses 76,000 38,000 38,000
Operating income (loss) $59,000 $87,000 $(28,000 )
If $20,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?
A) Decrease $30,000
B) Increase $10,000
C) Increase $69,000
D) Increase $128,000
B
Explanation: B)
Contribution Margin $125,000
Less Fixed Expenses 56,000
New Net income 69,000
Less original OI 59,000
Increase in OI $10,000
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