Question

Burger Emporium Inc. is currently losing $100,000 per year on its Zhou Burger product line. The revenue from the Zhou Burger is $500,000 per year. The related variable costs are $300,000 and the fixed costs specific to the Zhou Burger operation are $300,000 per year. Burger Emporium Inc. is deciding whether or not they should drop their Zhou Burger line. They suspect $160,000 of the fixed costs will be avoidable if they drop the line. Assuming there are no opportunity costs, what should they do from a financial perspective

Answer 1

Answer:

The correct answer to the following question will be "keeping the product line since they would lose an extra $40000 if they dropped".

Explanation:

                                              Keep                                         Drop

Loss                             $100000 (given)                                    -

Fixed asset loss                      -                                     (300000-160000)

                                                                                   

Loss                                     $100000                                    140000

If dropped, so the $40000 damage would be included. Such that the correct approach is "keeping the product line since they would lose an extra $40000 if they dropped."