Question

A company has three product lines, one of which reflects the following results: Sales $235000 Variable expenses 135000 Contribution margin 100000 Fixed expenses 130000 Net loss $ (30000) If this product line is eliminated, 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. If management decides to eliminate this product line, the company’s net income will

Answer 1

Answer:

If management decides to eliminate this product line, the company’s net income will reduce by $22,000

Explanation:

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.

In a shut down decision , the following relevant cash flows should be considered:

1. Lost contribution from the product to be shut down
2. Savings in fixed directly attributable to the product under consideration.

                                                                                                           $                                                                                            

Lost contribution from shut down                                        (100,000)

Savings in fixed cost (60% × 130,000)                                  78,000

Net loss from shut down                                                        (22,000)

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