Question

3.Westfall Watches has two product lines: Luxury watches and Sporty watches. Assuming the Sporty line is...

3.Westfall Watches has two product lines: Luxury watches and Sporty watches. Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Sporty line is used to increase the production of Luxury watches by 250%, how will operating income be affected given the following Income statement data?

Total

Luxury

Sporty

Sales revenue

$490,000

$360,000

$130,000

Variable expenses

355,000

235,000

120,000

Contribution margin

135,000

125,000

10,000

Fixed expenses

76,000

38,000

38,000

Operating income (loss)

$59,000

$87,000

$(28,000)

Select one:

a. Increase $236,500

b. Increase $177,500

c. Decrease $177,500

d. Increase $299,500

Business   Accounting   
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Answer #1

Westfall Watches has two product line and wish to discontinue spoty watches.

If sporty watches is dis continued, then the fixed cost will remain constant but the selling of Luxury watches will increase by 250 %.

This will increase the sales by $900000 ( i.e 360000*250%).

The existing sales of Luxury watches is 360000 and variable cost is 235000,

thus the variable  % = 235000/ 360000 = 65.2778 %.

The effect of discontinuation will be as follows:

Existing Data Proposed Increase
sales (A) 360000 900000 (360000*250%)
variable expenses (B) 235000

587500 (235000*65.2778%)
contribution Margin (A-B) 125000 312500
fixed cost 38000 76000
Operating income 87000 236500

Thus Operating Income will be increased by $236500 if sporty watches is discontinued,

The correct Option is ----A

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