Question

Ace Company has two product lines. The following income statements are shown for its two product lines and the company as a whole:

	Office Supplies	Computer	Total
Sales	$250,000	$360,000	$610,000
Less: Variable expenses	100,000	252,000	352,000
Contribution margin	$150,000	$108,000	$258,000
Less: Fixed expenses	70,000	120,000	190,000
Operating income	$80,000	(12,000)	$68,000

Additional information:

Management estimates that the dropping of the Computer product line would result in a $50,000 (20%) decrease in sales in the Office Supplies product line.

Even if the Computer product line is dropped, only 75% of the Computer product line’s fixed expenses will be eliminated.  

Since the Computer product line incurred a loss, the company is considering dropping the product line. If the Computer product line is dropped, the company’s total income will:

	A.	decrease by $68,000
	B.	increase by $42,000
	C.	decrease by $48,000
	D.	increase by $12,000

Answer 1

Answer : C = Decrease by $ 48,000.

:: If Computer product line is eliminated

>> Fixed cost of computer still incur = 120,000 * 25 %

>> Fixed cost of computer still incur = 30,000.

>> Contribution margin of office supplies decrease by = $ 150,000 * 20 %

​​​​​​>> Contribution margin of office supplies decrease by = $ 30,000.

>> Loss of computer line doesn't incur = $ 12,000

>> Net Effect on Income = $ 12,000 - $ 30,000 - $ 30,000

>> Net decrease of $ 48,000