Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow: Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $28,000 per year, how will operating income be affected?
A)Decrease $8000
B)Increase $64,000
C)Increase $8000
D)Increase $120,000

Question

Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:  Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $28,000 per year, how will operating income be affected?
A)Decrease $8000 
B)Increase $64,000 
C)Increase $8000 
D)Increase $120,000

Quizplus · Accepted Answer

Discontinuing the Fashion line will result in a decrease in revenue of $240,000 but will also result in a decrease in variable costs of $120,000. This will leave a decrease in contribution margin of $120,000. However, since total fixed costs remain unchanged, operating income will increase by the amount of the rented space, which is $28,000. Therefore, operating income will increase by $8,000 ($28,000 - $20,000).

Boots Plus Has Two Product Lines: Hiking Boots and Fashion