Final answer:
Whether Blowing Sand's net operating income will increase or decrease depends on the Drafty product line's current contribution to the overall costs. The change in net operating income is contingent upon if the product line's revenue exceeds its associated costs.
Step-by-step explanation:
To determine whether Blowing Sand's net operating income will increase or decrease by eliminating the Drafty product line, we need to consider the effects of removing the product's fixed costs and the redistribution of common fixed costs. Currently, by cutting the Drafty line, $88,000 of direct fixed costs are saved, but the $74,000 of common fixed costs will be reallocated to the remaining product lines.
If the Drafty product line is generating less revenue than its total costs (direct fixed costs, common fixed costs, and variable costs), then eliminating it would presumably increase the company's net operating income, as it would remove a loss-making segment. However, if the Drafty line's total costs are less than the revenue it generates, the removal would decrease net operating income.
Two scenarios where it's clear that elimination will affect income: (1) If the drafty line's loss exceeds $88,000, elimination will increase overall income by the differential after that loss is removed. (2) If the drafty line is contributing more than $88,000 towards covering its costs and common costs, elimination will decrease income by the shortfall in contribution margin after its removal.
Reallocation of fixed costs does not inherently change the total costs for Blowing Sand, but it does impact profitability per product line, which must be considered when evaluating overall business performance.