Question

Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow: Total Hiking Fashion Sales revenue $480,000 $340,000 $140,000 Variable expenses 355,000 235,000 120,000 Contribution margin 125,000 105,000 20,000 Fixed expenses 76,000 38,000 38,000 Operating income (loss) $49,000 $67,000 $(18,000) If $25,000 of fixed costs will be eliminated by discontinuing the Fashion line, how will operating income be affected for the company as a whole

Answer 1

Answer:

The operating income will increase by $ 25000.The new net profit would be $ 92000.

Explanation:

Boots Plus

Income Statement

                                         Total               Hiking             Fashion

Sales revenue              $480,000        $340,000          $140,000

Variable expenses        355,000           235,000            120,000

Contribution margin        125,000           105,000             20,000

Fixed expenses                76,000              38,000            38,000

Operating income (loss) $49,000            $67,000          $(18,000)

If $25,000 of fixed costs will be eliminated by discontinuing the Fashion line, the new income statement will be as follows

Boots Plus

Income Statement

                                               Hiking            

Sales revenue                      $340,000        

Variable expenses                235,000          

Contribution margin               105,000            

Fixed expenses                       13000=  38,000- $ 25000            

Operating income (loss)          $92,000        

The operating income will increase by $ 25000.The new net profit would be $ 92000.