Motion Rollerblades Has Three Product Lines-D,E,and F The Company Is Deciding Whether to Drop Product Line F

question 78

Multiple Choice

Motion Rollerblades has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | c | c | c | } \hline & \mathrm { D } & \mathrm { E } & \mathrm { F } \\\hline \text { Sales revenue } & \$ 90,000 & \$ 40,000 & \$ 31,000 \\\\\hline \text { Variable costs } & \underline { ( 40,000 } & \underline { ( 15,000 } ) & \underline { ( 10,000 } ) \\\\\hline \text { Contribution margin } & \$ 50,000 & \$ 25,000 & \$ 21,000 \\\\\hline \text { Fixed costs } & \underline { ( 20,000 } & \underline { ( 15,000 } ) & \underline { ( 23,000 } ) \\\\\hline \text { Operating income (loss) } & \underline { \$ 30,000} & \underline { \$ 10,000} & \underline { \$ ( 2000 ) } \\\\\hline\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Motion drops product line F and does not replace it,what effect will this have on operating income?

• A)Operating income will increase $2000.
• B)Operating income will increase $21,000.
• C)Operating income will increase $23,000.
• D)Operating income will decrease $21,000.

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Definitions:

Perfectly Elastic

Describes a situation in which the quantity demanded or supplied responds infinitely at a particular price level.

Income Elasticity

A measure of how the demand for a good or service changes in response to changes in consumers' income.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a specific price level.

Inelastic Demand

A situation where the demand for a good or service does not significantly change in response to price changes.