Question

Marinette Company makes several products, including canoes. The company has been experiencing losses from its canoe segment and is considering dropping that product line. The following information is available regarding its canoe segment. MARINETTE COMPANY Income Statement—Canoe Segment Sales $ 2,600,000 Variable costs Direct materials $ 570,000 Direct labor 620,000 Variable overhead 420,000 Variable selling and administrative 260,000 Total variable costs 1,870,000 Contribution margin 730,000 Fixed costs Direct 495,000 Indirect 420,000 Total fixed costs 915,000 Net income $ (185,000 ) 1. If canoes are discontinued, calculate the net income lost or gained. 2. Should management discontinue the manufacturing of canoes?

Answer 1

Answer:

a) Net income lost from discontinuation $235,000

b) Canoe should not be discontinued because a sum worth $235,000  generated by canoe would be lost if it is discontinued.

Explanation:

If canoe is discontinued the net income lost will be calculated as follows:

                                                                                 $

Sales revenue                                                  2,600,000

Variable cost                                                     (1,870,000)

Contribution                                                        730,000

Direct fixed cost                                                 (495,000)

Net income lost                                                    235,000

a) Net income lost from discontinuation $235,000

b) Canoe should not be discontinued because a sum worth $235,000  generated by canoe would be lost if it is discontinued.

Note that the indirect  fixed cost is not associated with the production of canoe , therefore whether or not canoe is produced it will still be incurred either way.

The direct fixed costs are associated with production of canoe hence, they are subtracted.