Momentum Rollerblades: Decision on Product Line F
Momentum Rollerblades Product Lines Analysis
Momentum Rollerblades has three product lines - D, E, and F. Here is the relevant financial information:
- D
- Sales revenue: $80,000
- Variable costs: $(20,000)
- Contribution margin: $60,000
- Fixed costs: $(15,000)
- Operating income: $45,000
- E
- Sales revenue: $40,000
- Variable costs: $(15,000)
- Contribution margin: $25,000
- Fixed costs: $(10,000)
- Operating income: $15,000
- F
- Sales revenue: $30,000
- Variable costs: $(12,000)
- Contribution margin: $18,000
- Fixed costs: $(23,000)
- Operating income: $(5,000)
Decision on Product Line F
The company is considering dropping product line F due to its operating loss. It is estimated that $21,000 of total fixed costs could be eliminated by dropping F. What impact would this decision have on operating income?
What effect would dropping product line F, with an operating loss, have on the operating income of Momentum Rollerblades?Final answer:
Dropping product line F, with an operating loss of $5,000, would actually increase Momentum Rollerblades' operating income by $16,000 because there would be $21,000 of fixed costs savings, which is more than the current contribution margin from product F.
Explanation:
When considering whether to drop product line F, which has an operating loss, we should examine the impact on the overall operating income for Momentum Rollerblades. Currently, product line F has a loss of $5,000. However, if $21,000 of its fixed costs can be eliminated by dropping the line, then the total operating income could potentially increase. Here is the calculation:
- Operating loss of product line F: $(5,000)
- Fixed costs savings by dropping F: $21,000
- Net effect on operating income: $21,000 - $5,000 = $16,000
By dropping product line F, Momentum Rollerblades would increase its operating income by $16,000 since the savings in fixed costs exceed the contribution margin that would be lost by eliminating the product.