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6 August, 06:36

Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: Total Luxury Sporty Sales revenue $ 490 comma 000 $ 360 comma 000 $130,000 Variable expenses 355 comma 000 235 comma 000 120,000 Contribution margin 135 comma 000 125 comma 000 10,000 Fixed expenses 78 comma 000 39 comma 000 39 comma 000 Operating income (loss) $ 57 comma 000 $ 86 comma 000 $ (29 comma 000 ) If $ 23 comma 000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

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  1. 6 August, 07:58
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    The operating income will increase by $13,000.

    Explanation:

    Giving the following information:

    Sales revenue

    Total = $490,000

    Luxury = $360,000

    Sporty = $130,000

    Variable expenses:

    Total = $355,000

    Luxury = $235,000

    Sporty = $ 120,000

    Contribution margin

    Total = $135,000

    Luxury = $125,000

    Sporty = $ 10,000

    Fixed expenses:

    Total = $78,000

    Luxury = $39,000

    Sporty = $39,000

    Operating income (loss):

    Total = $57,000

    Luxury = $86,000

    Sporty = $ (29,000 )

    New Income Statement:

    Sales = 360,000

    Variable costs = 235,000 (-)

    Contribution margin = 125,000

    Fixed costs = 39,000 + 16,000 = 55,000

    Operating income = 70,000

    The operating income will increase by $13,000.
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