Question

Huskie Manufacturing has two major product lines, Black and Red. Income statements for the two product lines follow: Black Red Revenues $500,000 $400,000 Variable costs 300,000 150,000 Product line fixed costs 130,000 100,000 Allocated corporate fixed costs 120,000 90,000 Operating income (loss) $(50,000) $60,000 If the Black product line were dropped, all of its product line fixed costs could be avoided. Should the Black product line be dropped, and why

Answer 1

Answer:

Black product line should not be dropped.

If the product line is dropped, this would reduce the Huskie's entire profit by $70,000.

Explanation:

To determine the the impact of dropping the Black product line, we will consider the relevant cash flows associated with decision. These include;

                                                                                                     $

Lost contribution from dropping the product

(500,000 -300,000)                                                           (200,000)

Savings in line fixed cost                                                     130,000

Net contribution lost                                                            (70,000)

Going by the above analysis, it is obvious that Product line contributes $70,000 toward the recovering of the allocated corporate fixed cost of 210,000 i.e. (120,000 +90,000).

Therefore, if the product kine is dropped, this would reduce the Huskie's entire profit by $70,000.

Black product line should not be dropped.