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.

MARINETTE COMPANY Income Statement—Canoe Segment
Sales				$	2,000,000
Variable costs
Direct materials	$	450,000
Direct labor		500,000
Variable overhead		300,000
Variable selling and administrative		200,000
Total variable costs					1,450,000
Contribution margin					550,000
Fixed costs
Direct		375,000
Indirect		300,000
Total fixed costs					675,000
Net income				$	(125,000)

1. If canoes are discontinued, calculate the net income lost or gained.

Answer 1

Incremental analysis:
			Continue	Dropping	Net Increase/Decrease in
					Income
Sales revenue			2,000,000	0	-2000000
Variable cost:
Material			-450000	0	450000
Labour			-500000	0	500000
Variable Overheads			-300000	0	300000
variable Selling and Admin			-200000	0	200000
Fixed cost:
Direct Fixed cost			-375000	0	375000
Indirect fixed cost			-300000	-300000	0
Net Incremental Income/(loss)			125000	-300000	-175,000
Hence, the segment shall not be dropped as it leads incremental loss of $175000.