Question

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 Sportsballs discontinues the Soccer Balls product line?

Answer 1

If soccer balls product line is discontinued the net income will reduce by $6000 that is the segment income on soccer ball product line.

The income will reduce because even though the company will save variable cost and direct fixed cost it will still incur same $8000 in allocated fixed cost which will then be allocated to other products line. We can say that if soccer line is discontinued it will loose the segment income of soccer line.

Given below is analysis that shows how income will decrease

Income statement
	Soccer balls	Baseballs	Tennis balls	Total
Units sold	1000	2000	2000	5000
Revenues		$ 40,000.00	$ 23,000.00	$ 63,000.00
Variable costs		$ 22,000.00	$ 12,000.00	$ 34,000.00
Contribution margin	$                 -	$ 18,000.00	$ 11,000.00	$ 29,000.00
Direct fixed cost		$    3,000.00	$    2,000.00	$    5,000.00
Segment income	$                 -	$ 15,000.00	$    9,000.00	$ 24,000.00
Allocated fixed cost	$    8,000.00	$    8,000.00	$    8,000.00	$ 24,000.00
Net operating income	$ (8,000.00)	$   7,000.00	$    1,000.00	$          0.00

When we look at Total column we can see that net income has become $0.00 which was earlier $6000 so $6000 will be reduced if soccer line is discontinued.