Question

            For Sonya, the following income statements are shown for its two product lines and the company as a whole:

	Fruits	Vegetables	Total
Sales	$500,000	$300,000	$800,000
Less: Variable expenses	300,000	270,000	550,000
Contribution margin	200,000	30,000	250,000
Less: Fixed expenses	170,000	80,000	270,000
Operating income	$30,000	($50,000)	($20,000)

Even if the Vegetable product line is dropped, some employees have to be kept anyway. Therefore, 10% of the Vegetables line’s fixed expenses will continue.

1. If the Vegetables product line is dropped, what will happen to the profit for the company as a whole? Indicate the direction (increase or decrease) and amount (by how much).

2. Now suppose if Vegetables are dropped, sales of Fruits will drop by 30%. If the Vegetables product line is dropped, what will happen to the profit for the company as a whole? Indicate the direction (increase or decrease) and amount (by how much).

Answer 1

The table given in question has the figures of "Total" Column incorrect. Hence i am creating the whole table again and then will solve the questions as per the following table only:

ORIGINAL TABLE

	Fruits	Vegetables	Total
Sales	500,000	300,000	800,000
less: variable expenses	(300,000)	(270,000)	(570,000)
Contribution	200,000	30,000	230,000
Less: Fixed expenses	(170,000)	(80,000)	(250,000)
Operating income	30,000	(50,000)	(20,000)

(i) Vegetables product line is dropped

	Fruits	Vegetables	Total
Sales	500,000	0	500,000
less: variable expenses	(300,000)	0	(300,000)
Contribution	200,000	0	200,000
Less: Fixed expenses	(170,000)	(8,000)	(178,000)
Operating income	30,000	(8,000)	22,000

The profit for the company as a whole will increase by 42,000 [22,000 - (-20,000)]

(ii) Sale of fruits drop by 30%

	Fruits	Vegetables	Total
Sales	350,000	0	350,000
less: variable expenses	(210,000)	0	(210,000)
Contribution	140,000	0	140,000
Less: Fixed expenses	(170,000)	(8,000)	(178,000)
Operating income	(30,000)	(8,000)	(38,000)

The profit for the company as a whole will decrease by 18,000 [-38,000 - (-20,000)]