Question

Exercise 23-13 Income analysis of eliminating Departments LO A1

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. (Leave no cells blank. Enter zeros where appropriate.)

MARINETTE COMPANY Income Statement—Canoe Segment
Sales				$	2,500,000
Variable costs
Direct materials	$	550,000
Direct labor		600,000
Variable overhead		400,000
Variable selling and administrative		250,000
Total variable costs					1,800,000
Contribution margin					700,000
Fixed costs
Direct		475,000
Indirect		400,000
Total fixed costs					875,000
Net income				$	(175,000	)

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

2. Should management discontinue the manufacturing of canoes?

• No

• Yes

Answer 1

1.If the product line was eliminated, only the expenses incurred by the product line will be eliminated and common expenses allocated would continue to occur at the same level. Hence, indirect fixed costs are not relevant costs and will not be considered.

Savings in direct fixed Costs = $475,000

Less: Contribution Margin lost = $(700,000)

Net income lost on discontinuing = $(225,000)

net income lost = $225,000

2. manufacturing of canoes should not be discontinued (because of loss)

NO