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

question 169

Multiple Choice

Cambridge Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | l | c | c | } \hline & \text { D } & \text { E } & \text { F } \\\hline \text { Sales revenue } & \$ 70,000 & \$ 50,000 & \$ 30,000 \\\hline \text { Variable costs } & ( 30,000 ) & ( 10,000 ) & ( 12,000 ) \\\hline \text { Contribution margin } & \$ 40,000 & \$ 40,000 & \$ 18,000 \\\hline \text { Fixed costs } & ( 20,000 ) & ( 5,000 ) & \underline { ( 25,000 ) } \\\hline \text { Operating income (loss) } & \$ 20,000 & \$ 35,000 & \$ ( 7,000 ) \\\hline\end{array}$$ The company is deciding whether to drop product line F because it has an operating loss.Assume that $21,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating income?

• A)Operating income will increase by $25,000.
• B)Operating income will increase by $3,000.
• C)Operating income will decrease by $25,000.
• D)Operating income will decrease by $3,000.

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