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

question 67

Multiple Choice

Macaulay Roller Skates has three product lines-D,E,and F.The following information is available: $$\begin{array} { | l | c | c | c | } \hline & \text { D } & \text { E } & \text { F } \\\hline \text { Sales revenue } & \$ 80,000 & \$ 40,000 & \$ 31,000 \\\hline \text { Variable costs } & ( 40,000 ) & ( 10,000 ) & ( 12,000 ) \\\hline \text { Contribution margin } & \$ 40,000 & \$ 30,000 & \$ 19,000 \\\hline \text { Fixed costs } & ( 20,000 ) & ( 10,000 ) & ( 25,000 ) \\\hline \text { Operating income (loss) } & \$ 20,000 & \$ 20,000 & \$ ( 6,000 ) \\\hline\end{array}$$ 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 $6,000.
• B) Operating income will increase $19,000.
• C) Operating income will increase $25,000.
• D) Operating income will decrease $19,000.

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Definitions:

Units-Of-Output Method

A depreciation method that allocates the cost of an asset over its useful life based on the units it produces, reflecting usage rather than mere passage of time.

Depreciation Expense

An accounting method that systematically allocates the cost of a tangible asset over its useful life.

Commercial Substance

A situation in future cash flows of a business that are expected to change significantly due to a transaction, indicating the transaction has economic impact.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded against a company's assets over time.