Boots Plus Income Statement Analysis

How will operating income be affected if $29,000 of fixed costs are eliminated by discontinuing the Fashion line?

Will the operating income increase, decrease, or remain the same?

Answer:

The operating income will increase by $9,000.

To calculate the effect on operating income, we need to consider the fixed costs that can be avoided by discontinuing the Fashion line. The fixed expenses for the Fashion line are $40,000, and if $29,000 of these costs are eliminated, the remaining avoidable fixed costs will be $11,000.

Given that the Fashion line's contribution margin is $20,000 and its operating income is $(20,000) (a loss), we can calculate the effect on income as follows:

Effect on income = Avoidable fixed costs + Operating income

Effect on income = $29,000 - $20,000 = $9,000 increase

Therefore, by discontinuing the Fashion line and eliminating $29,000 of fixed costs, Boots Plus will see a $9,000 increase in operating income.