Question

Stretch Inc. sells both yoga pants and yoga mats. Managers for Stretch are concerned about their operating losses. They are considering dropping their yoga mat product line. Operating income by prouct line is shown below. Prepare a new operating income analysis assuming Stretch will only sell yoga pants. Then explain why Stretch should drop the yoga mat product line.
Stretch Inc.
Income Statement
For year ended December 31, 2017
	Total		Yoga Pants		Yoga Mats
Sales Revenue	$        425,000		$        299,000		$        126,000
Variable Costs	221,000		136,000		85,000
Contribution Margin	204,000		163,000		41,000
Fixed Costs:
Fixed Manufacturing	123,000		62,000		61,000
Selling & Administrative	58,000		46,000		12,000
Operating Income	23,000		55,000		(32,000)
Stretch Inc.
Income Statement
For year ended December 31, 2017
	Total
Sales Revenue
Variable Costs
Contribution Margin
Fixed Costs:
Fixed Manufacturing
Selling & Administrative
Operating Income
Explanation:

Answer 1

• Requirement

Stretch Inc.
Income Statement
For year ended December 31, 2017
	Total
Sales Revenue	$              299,000
Variable Costs	$              136,000
Contribution Margin	$              163,000
Fixed Costs:
Fixed Manufacturing	$              123,000
Selling & Administrative	$                58,000
Operating Income (loss)	$              (18,000)
Explanation: When 'Yoga Mat' line is dropped, the sales, variable cost and contribution margin of Yoga Mats will be lost. Hence, above Sales, Variable cost and contribution margin will of Yoga Pants only. However, Fixed Costs will not be avoided, and "total" fixed cost (same as before) would still be incurred. The Yoga Mats should not be DISCONTINUED, because it was earning a positive contribution margin of $ 41,000. Without this, the net operating income decreased by $ 41,000, [from $ 23000 to $ (18,000)]. Even though it has a operating loss, the contribution margin earned used to cover some of its un-avoidable fixed expenses.