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 $ 520 comma 000 $ 390 comma 000 $130,000 Variable expenses 375 comma 000 255 comma 000 120,000 Contribution margin 145 comma 000 135 comma 000 10,000 Fixed expenses 79 comma 000 39 comma 500 39 comma 500 Operating income (loss) $ 66 comma 000 $ 95 comma 500 $ (29 comma 500 ) If $ 20 comma 000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

Question

Business

Reese

5 May, 07:26

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 $ 520 comma 000 $ 390 comma 000 $130,000 Variable expenses 375 comma 000 255 comma 000 120,000 Contribution margin 145 comma 000 135 comma 000 10,000 Fixed expenses 79 comma 000 39 comma 500 39 comma 500 Operating income (loss) $ 66 comma 000 $ 95 comma 500 $ (29 comma 500 ) If $ 20 comma 000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

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Boo Bug · Answer 1

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Explanation:

Quite a lot of things can affect the operating income (such as the prices for raw materials, the company's pricing strategy, or how expensive their labor costs) of any business venture.

In calculating that of westfall's sporty watches:

Unavoidable fixed costs for Sporty = (38500-23000) = $15500

Hence new net operating income = (126500-15500) = $111,000

Hence increase in net operating income = (111000-98000) = $13000 (A).