Question

Smiles Corporation has two product lines Whitening and Straightening. Operating income for each of the product lines is below: Whitening Straightening Revenues $1,070,000 $880,000 Operating Costs Costs of Goods Sold 750,000 660,000 Lease rent (renewable each year) 90,000 75,000 Labour costs (paid hourly basis) 42,000 42,000 Depreciation equipment 25,000 22,000 Utilities 43,000 46,000 Allocated Corporate Overhead 50,000 40,000 Total Operating Costs 1,000,000 885,000 Operating Income (loss) 75,000 (5,000) Smiles Corporation has an opportunity to open another product line, Extractions, with revenues and costs identical to Straightening (including costs of $22,000 to acquire equipment with a one-year useful life and zero disposal value). Starting this product line will increase corporate overhead costs by $6,000. If Smiles Corporation decided to open another product line, Extractions, what would be Extractions’ operating income (loss)?

a. $29,000

b. $35,000

c. $(26,000)

d. $(5,000)

e. $31,000

Answer 1

Income statement (Extractions)

Revenues (i)	880,000
Operating Costs:
Costs of Goods Sold	660,000
Lease rent	75,000
Labor costs	42,000
Depreciation on equipment	22,000
Utilities	46,000
Allocated Corporate Overhead	6,000
Total Operating Costs (ii)	851,000
Operating Income (i – ii)	$29,000

Extractions’ operating income = $29,000

Correct option is (a)

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