Momentum Rollerblades: Decision on Product Line F

Momentum Rollerblades Product Lines Analysis

Momentum Rollerblades has three product lines - D, E, and F. Here is the relevant financial information:

• D
  • Sales revenue: $80,000
  • Variable costs: $(20,000)
  • Contribution margin: $60,000
  • Fixed costs: $(15,000)
  • Operating income: $45,000
• E
  • Sales revenue: $40,000
  • Variable costs: $(15,000)
  • Contribution margin: $25,000
  • Fixed costs: $(10,000)
  • Operating income: $15,000
• F
  • Sales revenue: $30,000
  • Variable costs: $(12,000)
  • Contribution margin: $18,000
  • Fixed costs: $(23,000)
  • Operating income: $(5,000)

Decision on Product Line F

The company is considering dropping product line F due to its operating loss. It is estimated that $21,000 of total fixed costs could be eliminated by dropping F. What impact would this decision have on operating income?

Final answer:

Dropping product line F, with an operating loss of $5,000, would actually increase Momentum Rollerblades' operating income by $16,000 because there would be $21,000 of fixed costs savings, which is more than the current contribution margin from product F.

Explanation:

When considering whether to drop product line F, which has an operating loss, we should examine the impact on the overall operating income for Momentum Rollerblades. Currently, product line F has a loss of $5,000. However, if $21,000 of its fixed costs can be eliminated by dropping the line, then the total operating income could potentially increase. Here is the calculation:

• Operating loss of product line F: $(5,000)
• Fixed costs savings by dropping F: $21,000
• Net effect on operating income: $21,000 - $5,000 = $16,000

By dropping product line F, Momentum Rollerblades would increase its operating income by $16,000 since the savings in fixed costs exceed the contribution margin that would be lost by eliminating the product.