Question

Question #1: Holly Sports balls has three product lines in its retail stores: soccer balls, baseballs, and tennis balls. Results of the fourth quarter are presented below:

                                              Soccer Balls   Baseballs   Tennis Balls      Total

Units sold                             1,000           2,000           2,000          5,000

Revenue                            $22,000       $40,000       $23,000      $85,000

Variable departmental costs 15,000         22,000         12,000        49,000

Direct fixed costs                  1,000           3,000           2,000          6,000

Allocated fixed costs             8,000           8,000           8,000       28,000

Net income (loss)              $ (2,000)       $ 7,000        $ 1,000      $ 6,000

The allocated fixed costs cannot be avoided. There will be no changes in the demand of individual products caused by changes in other product lines.

Instructions

What will happen to profits if Holly Sports balls discontinues the Soccer Balls product line?

Answer 1

Current profit of Holly sports balls before discontinuation = $6,000

If soccer balls product line is discontinued, the company will still need to incur allocated fixed cost as they are unavoidable. The only difference it will make is that the allocated fixed cost part of soccer balls line product will be allocated between other two divisions.

Direct fixed costs will still need to be spent as they are incurred only if the Soccer Balls product line is continued.

Hence, if Soccer Balls Product Line is discontinued the company will lose revenue and will not have to spend Variable department cost and direct fixed costs.

Hence, the profit that will be lost if Soccer Balls Product Line is discontinued = Revenue - Variable departmental cost - Direct fixed costs

= $22,000 - $15,000 - $1,000 = $6,000

Hence, the profit of the company after discontinuation = Profit before discontinuation-Loss of profit from discontinuation

Hence, the profit of the company after discontinuation = $6,000 - $6,000 = $0

Hence, the profit of the company will reduce to $0 from $6,000 if they discontinue the Soccer Balls product line.