Answer:
1. <u>Impact on profits</u>:
Contribution Margin = $63,000
Less: Traceable Rent = $10,000
Less: Salary of Director = $10,000
Total avoidable fixed expenses = <u>$20,000</u>
Decrease in Profits = <u>$43,000</u>
Hence, the profits will reduce by $43,000 if the basketball program is eliminated.
3. If the allocated fixed costs can be reduced by $50,000. The program should be dropped since there will be an increase in profits by $7,000 (50,000 - 43,000). The avoidable costs and revenues should be taken into account for the purpose of this decision. If the avoidable costs are more than the revenues, the line should be dropped else not.
Hence, since after considering the reduction in allocated fixed costs, the avoidable costs are greater than revenues, the program should be dropped
