Question

A company has three product lines, one of which reflects the following results: Sales $ 215,000 Variable expenses 125,000 Contribution margin 90,000 Fixed expenses 140,000 Net loss $ (50,000 ) If this product line is eliminated, 60% of the fixed expenses are traceable fixed expenses, which can be eliminated and the other 40% are common fixed expenses that cannot be avoided. If management decides to eliminate this product line, the company's net income will ________. increase by $50,000 decrease by $90,000 decrease by $6,000 increase by $6,000

Answer 1

Answer: option C

Explanation: THIS CAN BE REPRESENTED AS FOLLOWS :-

If we eliminate the product there would be no sales, no variable expenses and therefore, no contribution.

  sales                    = nil

-variable expenses= nil

contribution              = nil

- fixed expenses      = 56,000

NET LOSS              = (56000)

.

NOTE :-

Fixed expense = (140,000)*(40%)= 56,000

.

.

Thus increase in loss would be 56000- 50,000=6000