Question

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A segmented income statement for a recent period follows:

                                              Wood                  Aluminum             Hard Rubber                     Total                  

Sales                                  $500,000                $200,000                 $65,000                   $765,000

Variable expenses                  325,000                  140,000                   58,000                       523,000

Contribution margin                175,000                    60,000                    7,000                       242,000

Fixed expenses                       75,000                    35,000                   22,000                       132,000

Net income (loss)                 $100,000                $ 25,000                $(15,000)                    $110,000

Assume none of the fixed expenses for the hard rubber line are avoidable. What will total net income be for Abel if the line is dropped?

Answer 1

	Before line drope	After line drope
Sales	$                     765,000	$765,000 - $65,000 = $700,000
Variable expenses	$                     523,000	$523,000 - $58,000 = $465,000
Contribution margin	$                     242,000	$700,000-$465,000 = $235,000
Fixed expenses	$                     132,000	$                                            132,000
Net income (loss)	$                     110,000	$235,000-$132,000 = $103,000

if company droped rubber line, overall company net income will reduce by $7,000