The income statement for Slumber Company is divided by its two product lines, bl

Question

The income statement for Slumber Company is divided by its two product lines, blankets and pillows, as follows: Blankets Pillows Total Sales revenue $620,000 $300,000 $920,000 Variable costs (455,000) (241,000) (696,000) Contribution margin $165,000 $59,000 $224,000 Fixed costs (74,000) (74,000) (148,000) Operating income (loss) $91,000 $(15,000) $76,000 Slumber is considering eliminating the pillows product line. If this line is eliminated, Slumber will be able to eliminate $74,000 of total fixed costs. How would this business decision impact operating income? A. increase of $15,000 in operating income B. increase of $133,000 in operating income C. increase of $74,000 in operating income D. decrease of $59,000 in operating income

Explanation / Answer

Particulars Blanket Pillow Total $ $ $ Sales Revenue 620,000 300,000 920,000 Less : Variable cost -455,000 -241,000 -696,000 Contribution 165,000 59,000 224,000 Less : Fixed cost -74,000 -74,000 -148,000 Operating Income 91,000 -15,000 76,000 The Question now is that the Pillow division is operating under a loss of 15,000. So, If Pillow division is eliminated, the company is saving on the fixed cost. Also, it is implied that the company is denayed of the revenue from it as well. Hence, the result will be the total of the revenue, cost and income will be from the blanket division alone. The result being Operating income will be $ 91,000 (instead of $76,000) Hence, the answer is A that means, the company increases its operating income from $76,000 to $91,000.

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