ALHAMD Watch Company manufactures two product lines—digital watches and analog w
ID: 2592039 • Letter: A
Question
ALHAMD Watch Company manufactures two product lines—digital watches and analog watches. Income statement data for the most recent year follow:
Total
Digital Watches
Analog Watches
Sales revenue
$850,000
$500,000
$350,000
Variable expenses
(530,000)
(250,000)
(280,000)
Contribution margin
$320,000
$250,000
$70,000
Fixed expenses
(180,000)
(90,000)
(90,000)
Operating income (loss)
$140,000
$160,000
$(20,000)
Assuming fixed costs remain unchanged, and that there would be no adverse effect on other sales, what will be the effect of dropping the Analog Watches line on the operating income of the company?
Total
Digital Watches
Analog Watches
Sales revenue
$850,000
$500,000
$350,000
Variable expenses
(530,000)
(250,000)
(280,000)
Contribution margin
$320,000
$250,000
$70,000
Fixed expenses
(180,000)
(90,000)
(90,000)
Operating income (loss)
$140,000
$160,000
$(20,000)
Explanation / Answer
Answer:-The effect of dropping Analog Watches line on the operating income of the company, the operating income will decrease by $70000.
Explanation:- After dropping the Analog Watches line fixed cost of the company remain unchanged ie Unavoidable fixed cost.Hence fixed cost have no effect on the decision part of the company. Hence company will loose contribution margin by $70000.
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