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 ​$500,000 ​$360,000 ​$140,000 Variable expenses ​375,000 ​255,000 ​120,000 Contribution margin ​125,000 ​105,000 ​20,000 Fixed expenses ​80,000 ​40,000 ​40,000 Operating income​ (loss) ​$40,000 ​$65,000 ​($20,000) If​ $30,000 of fixed costs will be eliminated by discontinuing the Fashion​ line, how will operating income be​ affected?

Answer 1

The operating income would be increased by $10,000.

Step-by-step explanation:

Here we are being told that fashion line is being discounted to reduce the fixed cost , so here we can calculate what would net operating income would be when the hiking boots line is continuing and compare it with current operating income and see whether it has increased or decreased from discontinuing the fashion line.

SALES REVENUE HIKING = $360,000

(-) VARIABLE EXPENSES = $255,000

CONTRIBUTION MARGIN = $360,000 - $255,000

= $105,000

(-) FIXED COST = $80,000 - $30,000(FIXED COST ELIMINATED)

= $50,000

NET OPERATING INCOME = $105,000 - $50,000

= $ 55,000

So with continuing the business with only hiking line income is $55,000 and earlier with both products the income was $45,000, so therefore there would be an increase in operating income b $10,000.

Answer 2

Net Operating Income rises by $10,000 when Fashion Boots is discontinued.

Step-by-step explanation:

Current operating profit for Boots Plus = $45,000

that is $65,000 profit from Hiking and $20,000 losses from Fashion

In case if Fashion boots is discontinued, then fixed cost eliminated = $30,000

In that case Total fixed cost of fashion boots non eliminated = $40,000 - $30,000 = $10,000

Which will be loss from Fashion as no other operating activity will be there.

Net operating profit of the company will be

Profit from Hiking Boots = $65,000

Less: Loss from Fashion Sales = $10,000 (Fixed Cost not eliminated)

Net Operating profit = $65,000 - $10,000 = $55,000

Net Operating Income rises by $10,000 when Fashion Boots is discontinued.