Question

Holly Sportsballs has 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 decrease by $6000

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

It can be seen that earlier net overall income was $6000 which is now $0.00. it means net income will decrease if Soccer division is discontinued. The reason behind this is that soccer division’s discontinuation will reduce segment margin of soccer division which was of $ 6000 which ultimately reduced net income.