Question

The income statement for Slumber Company is divided by its two product​ lines, blankets and​ pillows, as​ follows: Blankets Pillows Total Sales revenue $ 620 comma 000 $ 300 comma 000 $ 920 comma 000 Variable costs ​(465 comma 000​) ​(241 comma 000​) ​(706 comma 000​) Contribution margin $ 155 comma 000 $ 59 comma 000 $ 214 comma 000 Fixed costs ​(75 comma 000​) ​(75 comma 000​) ​(150 comma 000​) Operating income​ (loss) $ 80 comma 000 ​$(16 comma 000​) $ 64 comma 000 Slumber is considering eliminating the pillows product line. If this line is​ eliminated, Slumber will be able to eliminate $ 74 comma 000 of total fixed costs. How would this business decision impact operating​ income?

Answer 1

The net operating income would increase by = $15,000

Step-by-step explanation:

The amount by which the decision would impact operating income is the contribution loss plus savings in fixed costs.

Impact on net operating income = (Lost contribution) + savings in Fixed cost

Contribution = sales - variable cost

Loss in contribution

Contribution from Pillow =

$300,000 - $241,000 = $59,000

Note that the pillows division currently contributes $59,000

Therefore, eliminating it would mean a loss of $59,000 for the company

Savings in fixed cost

Specific fixed cost associated directly with pillow = $74,000.

This implies that $74,000 would be saved if the pillow is eliminated

The impact on Net Operating income =

lost contribution + savings in fixed cost

-59,000 + 74,000

= $15,000

The net operating income would increase by = $15,000