Question

The income statement for Lovely Locks is divided by its two product? lines, Curling Irons and? Straighteners, as? follows: Curling Irons Straighteners Total Sales revenue $ 630 comma 000 ?$260,000 $ 890 comma 000 Variable expenses $ 480 comma 000 ?$210,000 $ 690 comma 000 Contribution margin $ 150 comma 000 ?$50,000 $ 200 comma 000 Fixed expenses $ 85 comma 000 $ 85 comma 000 $ 170 comma 000 Operating income? (loss) $ 65 comma 000 $( 35 comma 000 ) $ 30 comma 000 If Lovely Locks can eliminate fixed costs of $ 35 comma 000 and increase the sale of Curling Irons by 6 comma 500 units at a selling price of $ 35 per unit and a contribution margin of $ 12 per? unit, then discontinuing the Straighteners should result in which of the? following?

Answer 1

Variable cost per unit of additional units sold = Sale price - Contribution margin

= $35 per unit - $12 per unit = $23 per unit

Calculation of net operating income if the straighteners are discontinued (Amts in $)

Sales revenue [630,000+(6,500 units*$35 per unit)]	857,500
Less: Variable costs [480,000+(6,500 units*$23 per unit)]	(629,500)
Contribution Margin [150,000+(6,500 units*$12 per unit)[]	228,000
Less: Fixed costs (170,000-35,000)	(135,000)
Operating Income (Loss)	93,000

Therefore the operating income of the company as a whole will be increased from $30,000 to $93,000 (i.e. by $63,000) if the straighteners are discontinued.