Gator Corporation manufactures several types of accessories. For the year, the gloves and mittens line had sales of $492,000, variable expenses of $367,000, and fixed expenses of $149,000. Therefore, the gloves and mittens line had a net loss of $24,000.

Required:

(a) If Gator eliminates the line, $42,000 of fixed costs will remain. Prepare an analysis showing whether the company should eliminate the gloves and mittens line.

The net operating income will decrease by $18,000.

Explanation:

Giving the following information:

Sales = $492,000

Variable expenses = (367,000)

Contribution margin = 125,000

fixed expenses = ($149,000)

Net operating income = ($24,000)

If the gloves and mittens line is eliminated, $42,000 of the fixed costs will remain. Therefore, the effect on income will be the difference between the current loss and the future loss.

Effect on income = 42,000 - 24,000 = 18,000 decreased income

The net operating income will decrease by $18,000.