Question

Diva Footwear is contemplating if it should continue producing platform shoes. The following information is available...

Diva Footwear is contemplating if it should continue producing platform shoes. The following information is available for the company’s segments.

Platform Shoes Athletic Shoes Boots
Sales $120,000 $420,000 $360,000
Variable costs 64,000 220,000 140,000
Contribution margin 56,000 200,000 220,000
Direct fixed costs 45,000 70,000 90,000
Allocated fixed costs 20,000 70,000 60,000
Net income ($9,000) $60,000 $70,000


If platform shoes are dropped, sales of athletic shoes are expected to drop by 10%. What impact will occur to Diva Footwear’s net income?

Income will increase by $9,000.
Income will decrease by $53,000.
Income will decrease by $31,000.
Income will decrease by $11,000.

Homework Answers

Answer #1
Correct Option C i.e.
Income will decrease by $31,000.
Calculation of Change in income if platform is dropped
Loss of Contribution of Platform Shoes                (56,000)
Saving in direct cost of Platform Shoes                  45,000
Loss of Contribution of Athletic Shoes                (20,000) (200000 * 10%)
Decrease in Income                (31,000)
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