Question

Beautiful Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: ...................................................Total........................Luxury.........................Sporty Sales revenue..........................$490,000.................$360,000.....................$130,000 Variable expenses.....................359,000...................235,000.......................124,000 Contribution margin.................131,000...................125,000............................6000 Fixed expenses............................76,000.....................38,000..........................38,000 Operating income (loss)...........$55,000...................$87,000.......................-$32,000 Assuming fixed costs remain unchanged, how would discontinuing the Sporty line affect operating income?

A) Decrease in total operating income of $6000
B) Decrease in total operating income of $131,000
C) Increase in total operating income of $49,000
D) Increase in total operating income of $130,000

Answer 1

Option (A) is the correct answer to this question.

Explanation:

The cessation of the Sporty line would forfeit the profits produced by the Sporty line business, but the business (Beautiful Watches) will have to bear the $38,000 fixed expenses involved by Spotify Watches.

However, if production continued, the Sporty watches would have suffered a loss of $32,000. The company will bear fixed costs regardless of whether the company continues or discontinues the Sporty line market.

Accordingly, the gross operating profits should have been

= Total operating expenses - ( $ 38000 - $ 32000)

= $ 55000 - ( $ 38000 - $ 32000)

= $ 55000 - $ 6000

= $ 49000

There is also a fall of $6000 ($55000-$49000) in operating profits.

Other options are incorrect because they are not related to the given scenario.