Question

Pottery Unlimited has two product lines: cups and pitchers. Income statement data for the most recent year follow:

Total Cups Pitchers
Sales revenue $460,000 $310,000 $150,000
Variable expenses 355,000 235,000 120,000
Contribution margin 105,000 75,000 30,000
Fixed expenses 76,000 38,000 38,000
Operating income (loss) $29,000 $37,000 ($8,000)

If $23694 in fixed costs will be eliminated by dropping the CUP line, how will operating income be affected? If income drops, use a negative sign in front of the number.

Answer 1

Answer:

- ($51,306)

Explanation:

Given that,

Loss of Contribution = $75,000

Fixed costs will be eliminated by dropping the CUP line = $23,694

Net loss on dropping cup line:

= Loss of contribution - Gain on fixed costs on dropping cup line

= $75,000 - $23,694

= - ($51,306)

Therefore, the net effect on dropping the cup line on net income is $(51,606).