Macaulay Roller Skates Has Three Product Lines-D,E,and F The Company Is Deciding Whether to Drop Product Line F

question 49

Multiple Choice

Macaulay Roller Skates has three product lines-D,E,and F.The following information is available: $\begin{array}{|l|r|r|r|}\hline&\mathrm{D} & \mathrm{E} & \mathrm{F}\\\hline \text { Sales revenue } & \$ 70,000 & \$ 60,000 & \$ 31,000 \\\hline \text { Variable costs } & (30,000) & (10,000 & \underline{12,000} \\\hline \text { Contribution margin } & \$ 40,000 & \$ 50,000 & \$ 19,000 \\\hline \text { Fixed costs } & (15,000) & \underline{(10,000} & \underline{(24,000) } \\\hline \text { Operating income (loss) } & \$ 25,000 & \$ 40,000 & \$(5,000) \\\hline\end{array}$
The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Macaulay drops product line F and does not replace it,what effect will this have on operating income?

• A)Operating income will increase $5,000.
• B)Operating income will increase $19,000.
• C)Operating income will increase $24,000.
• D)Operating income will decrease $19,000.

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Definitions:

Bond Interest Expense

Bond interest expense is the cost incurred by an issuer of bonds due to periodic interest payments made to bondholders.

Carrying Amount

The value at which an asset is recognized on the balance sheet after deducting any accumulated depreciation and impairment charges.

Bonds Payable

Bonds payable are long-term liabilities that represent funds borrowed by a company from investors, to be repaid with interest at a future date.

Free Cash Flow

The amount of cash a company generates after accounting for cash outflows to support operations and maintain its capital assets, indicative of financial health.