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