Impact of Eliminating Pillows Product Line on Operating Income
How would eliminating the pillows product line impact Slumber Company's operating income?
If Slumber eliminates the pillows product line, they will be able to eliminate $74,000 of total fixed costs. How would this business decision impact operating income?
Answer:
The net operating income would increase by $15,000
Explanation:
The amount by which the decision would impact operating income is the contribution loss plus savings in fixed costs.
Impact on net operating income = (Lost contribution) + savings in Fixed cost
Contribution = sales - variable cost
Loss in contribution
Contribution from Pillow =
$300,000 - $241,000 = $59,000
Note that the pillows division currently contributes $59,000
Therefore, eliminating it would mean a loss of $59,000 for the company
Savings in fixed cost
Specific fixed cost associated directly with pillow = $74,000.
This implies that $74,000 would be saved if the pillow is eliminated
The impact on Net Operating income =
lost contribution + savings in fixed cost
-59,000 + 74,000
$15,000
The net operating income would increase by $15,000