Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow: If $25,000 of fixed costs will be eliminated by discontinuing the Fashion line, how will operating income be affected?

The missing part of the question is found below:

Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:

Total Hiking Fashion

Sales revenue $480,000 $340,000 $140,000

Variable expenses 355,000 235,000 120,000

Contribution margin 125,000 105,000 20,000

Fixed expenses 76,000 38,000 38,000

Operating income (loss) $49,000 $67,000 $ (18,000)

Answer

By discontinuing fashion line of business operating income would increase by $5,000

Explanation:

The impact of eliminating Fashion line is evident in the revised Income statement below:

Hiking

Sales revenue $340,000

Variable expenses ($235,000)

Contribution margin 105,000

Fixed expenses ($76,000-$25,000) ($51,000)

Operating income $54,000

By discontinuing the fashion line of business, the operating income would increase by $5,000 ($54,000-$49,000) from $49,000 when operating the two lines of business to $54,000 when fashion is closed up.

The most appropriate action is to concentrate on the hiking line which might mean that Boots plus has a competitive edge in the Hiking business sector.