Question

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and) pillows, as follows:

Blankets Pillows Total
Sales revenue $620,000 $300,000 $920,000
variable expenses 465,000 240,000 705,000
Contribution margin 155,000 60,000 215,000
Fixed expenses 76,000 76,000 152,000
Operating income(loss) 79,000 (16,000) 63,000
Sweet Dreams is considering eliminating the pillow product line. If they do so, they will be able to eliminate $76,000 of total fixed costs. In that event, how would that business decision impact operating income?
A) Increase $42,000
B) Increase $76,000
C) Decrease $60,000
D) Increase $16,000

Answer 1

Effect on income= $16,000 increase

Step-by-step explanation:

Giving the following information:

Pillows

Sales revenue $300,000

variable expenses 240,000

Contribution margin 60,000

Fixed expenses 76,000

Operating income(loss) (16,000)

To calculate the effect on income, we need to use the following formula:

Effect on income= avoidable fixed costs - contribution margin

Effect on income= 76,000 - 60,000

Effect on income= $16,000 increase