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

question 155

Multiple Choice

Momentum Rollerblades has three product lines-D,E,and F.The following information is available: $\begin{array}{|l|l|l|l|} \hline& \text { D } & \text { E } & \text { F } \\\hline \text { Sales revenue } & \$ 80,000 & \$ 60,000 & \$ 31,000 \\\hline \text { Variable costs } & (30,000 ) & (15,000 ) & (12,000) \\\hline \text { Contribution margin } & \$ 50,000 & \$ 45,000 & \$ 19,000 \\\hline \text { Fixed costs } & (10,000) & (5000) & (23,000) \\\hline \text { Operating income (loss) } & \$ 40,000 & \$ 40,000 & \$(4000) \\\hline\end{array}$
The company is deciding whether to drop product line F because it has an operating loss.Assume that $22,000 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 $23,000.
• B) Operating income will increase by $3000.
• C) Operating income will decrease by $23,000.
• D) Operating income will decrease by $3000.

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Definitions:

Indirect Method

A way to prepare a cash flow statement where net income is adjusted for changes in balance sheet accounts to calculate cash flow from operating activities.

Net Cash Provided

Net cash provided is the amount of cash generated by a company's operating, investing, and financing activities within a specific period.

Depreciation

The systematic allocation of the cost of a tangible asset over its useful life, representing the asset's consumption and wear and tear.

Financing Activities

Transactions that result in changes in the size and composition of the equity and borrowings of an entity.