The income statement for Sleepy\'s Company is divided by its two product lines,
ID: 2435761 • Letter: T
Question
The income statement for Sleepy's Company is divided by its two product lines, blankets and pillows
Sales Revenue for Blankets $620,000; Pillows: $300,000; Total: $920,000
Variable expenses are $465,000; Pillows: $240,000; Total: $705,000
Contribution margin is 155,000; Pillows: 60,000; Total $215,000
Fixed expenses $76,000; Pillows: $76,000; Total: $152,000
Operating income (loss) Blankets $79,000; Pilliows $(16,000); Total: $63,000
If Sleepy's can eliminate fixed costs of $50,000 by dropping the pillow line, then dropping it should result in an increase or decrease in total operating income and by how much?
Explanation / Answer
Blanket Pillows Total
Sales Revenue $620,000 $300,000 $920,000
Less : Variable expenses $465,000 $240,000 $705,000
Contribution margin $155,000 $60,000 $215,000
Less : Fixed expense $76,000 $76,000 $152,000
Operating Income (loss) $79,000 ($16,000) $63,000
If sleepy drops pillow and save fixed cost by $50,000 then Operating Income from Blanket would be calculated as follows:
Blanket
Sales Revenue $620,000
Less : Variable expenses $465,000
Contribution margin $155,000
Less : Fixed expense $102,000 ($76,000 + $76,000 - $50,000)
Operating Income (loss) $53,000
The dropping would result in decrease in total operating income by $10,000 ($63,000 - $53,000).
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