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The income statement for Sleepy\'s Company is divided by its two product lines,

ID: 2435761 • Letter: T

Question

The income statement for Sleepy's Company is divided by its two product lines, blankets and pillows

Sales Revenue for Blankets $620,000; Pillows: $300,000; Total: $920,000

Variable expenses are $465,000; Pillows: $240,000; Total: $705,000

Contribution margin is 155,000; Pillows: 60,000; Total $215,000

Fixed expenses $76,000; Pillows: $76,000; Total: $152,000

Operating income (loss) Blankets $79,000; Pilliows $(16,000); Total: $63,000

If Sleepy's can eliminate fixed costs of $50,000 by dropping the pillow line, then dropping it should result in an increase or decrease in total operating income and by how much?

Explanation / Answer

                                            Blanket         Pillows        Total
Sales Revenue                      $620,000      $300,000     $920,000
Less : Variable expenses        $465,000      $240,000     $705,000
Contribution margin              $155,000        $60,000     $215,000
Less : Fixed expense              $76,000        $76,000      $152,000
Operating Income (loss)          $79,000      ($16,000)       $63,000

If sleepy drops pillow and save fixed cost by $50,000 then Operating Income from Blanket would be calculated as follows:

                                              Blanket
Sales Revenue                      $620,000
Less : Variable expenses        $465,000
Contribution margin              $155,000
Less : Fixed expense             $102,000   ($76,000 + $76,000 - $50,000)
Operating Income (loss)       $53,000

The dropping would result in decrease in total operating income by $10,000 ($63,000 - $53,000).