Question

Marinette Company makes several products, including canoes. The company has been experiencing losses from its canoe segment and is considering dropping that product line. The following information is available regarding its canoe segment. (Leave no cells blank. Enter zeros where appropriate.) MARINETTE COMPANY Income Statement—Canoe Segment Sales $ 3,300,000 Variable costs Direct materials $ 710,000 Direct labor 760,000 Variable overhead 560,000 Variable selling and administrative 330,000 Total variable costs 2,360,000 Contribution margin 940,000 Fixed costs Direct 635,000 Indirect 560,000 Total fixed costs 1,195,000 Net income $ (255,000 )

	Keep the department Eliminate the department Sales Expenses: Total expenses Net income (loss)

Answer 1

	Keep the department	Eliminate the department
Sales	3,300,000.00	0.00
Expenses:
Direct material	710,000.00	0.00
Direct labor	760,000.00	0.00
Variable overhead	560,000.00	0.00
Variable selling and administrative	330,000.00	0.00
Direct fixed costs	635,000.00	0.00
Indirect fixed costs	560,000.00	560,000.00
Total expenses	3,555,000.00	560,000.00
Net income/(loss)	(255,000.00)	(560,000.00)

Explanations:

All variable costs and direct fixed costs are avoidable and hence if the department is eliminated then these costs will become nil.

Net icnome in case department is kept = -$255,000. But when the department is eliminated the net income falls to -$560,000

Hence the department should not be eliminated.

If the department is discontinued then net income lost = 560,000-255000 = $305,000. As eliminating of the department will lead to net income lost of $305,000 the department should not be eliminated.