Answer:
If management decides to eliminate this product line, the company’s net income will reduce by $22,000
Explanation:
<em>A product should be shut down if doing so would make the savings in fixed costs associated with the product to exceed the lost contribution. Other wise , the product should remain.</em>
<em>In a shut down decision , the following relevant cash flows should be considered:</em>
- <em>Lost contribution from the product to be shut down</em>
- <em>Savings in fixed directly attributable to the product under consideration.</em>
$
Lost contribution from shut down (100,000)
Savings in fixed cost (60% × 130,000) <u> 78,000</u>
Net loss from shut down <u> (22,000)</u>
Net loss from shut down = $(22,000)
If management decides to eliminate this product line, the company’s net income will reduce by $22,000
This would be a focused growth strategy. P&G is divesting of some of their brands so that they can pay more attention to (focus on) their core brands. Sometimes businesses expand too much and lost the essence of what the company was founded upon.
Gary’s basis in the land and in the cabin is the basis of inherited possessions is the fair market value on the time of death or, if chosen by the estate, the alternative valuation date if less. As a result, Gary’s base will be $500,000 in the land and $700,000 for the cabin.
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❖ The correct answer choice is B. the City Hotel.
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