Question

Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: Assuming fixed costs remain unchanged, how would discontinuing the Sporty line affect operating income

Answer 1

Discontinuing the Sporty line affects positively to Westfall Watches's operating income.

Step-by-step explanation:

The formula to calculate the Break-even point as follows:

Break-even point = Fixed costs / (Price per unit - Variable costs per unit)

Because Fixed costs and Price per unit are unchanged, that discontinuing of Sporty watches line will eliminate variable costs per unit and, therefore, lower Westfall Watches's break-even point. The break-even point is the volume of sales a business must realize to pay all costs but earn no profit. A reduced break-even point improves a firm's income. The effect of discontinuing the Sporty line will improve the firm's operating income.