Question

A company has three product lines, one of which reflects the following results:

Sales	$226000
Variable expenses	129000
Contribution margin	97000
Fixed expenses	130000
Net loss	$ (33000)

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

increase by $33000.

decrease by $97000.

increase by $19000.

decrease by $19000.

Answer 1

Let the profit of the company except this product line was $X.

Therefore, Net Profit of the company before elimination of the Product Line = $(X - 33,000)

Now, Fixed Cost of the Product Line to be eliminated = $130,000

If product line is eliminated 40% of Fixed Cost still would be incurred = $130,000 x 40% = $52,000

Therefore, effect on elimination on net profit would be as under :

Loss of $33,000 would not be occuring but cost would be increased by $52,000

Therefore, Net Income of the company after elimination = $(X - 33,000 + 33,000 - 52,000)

= $(X - 52,000)

Hence, Effect on Income of Elimination

= (X - 52,000) - (X - 33,000)

= X - 52,000 - X + 33,000

= -19,000

Ans : Decrease by $19,000

For any queries please comment

If you are satisfied with the answer please click the LIKE THUMB