Question

Macho Sports Company sells soccer and baseball merchandise. The company is trying to decide whether or not to continue the baseball merchandise given the decline in the demand and current loss of this product line. The following information is available for the segments: Baseball Soccer Sales $120,000 $420,000 Variable costs 72.000 220.000 Contribution margin 48,000 200,000 Direct fixed costs 32,000 70,000 Allocated common fixed costs 20.000 70.000 Net income ($ 4,000) $ 60,000 If the baseball segment is dropped, soccer sales will be unaffected. What will be the effect on overall profits if the baseball segment is eliminated? Overall profits will increase $4,000. Overall profits will decrease by $48,000. Overall profits will decrease by $16,000. Overall profits will decrease by $120,000.

Answer 1

Effect on profit = Fixed Costs saved – contribution margin lost

= 32000-48000

=-$16000

I.e. Overall profits will decrease by $16000

Effect = Decrease in fixed costs + Increase in contribution margin – decrease in contribution margin

= 50,000+90,000*20% - 76000

= -$8000

Income will decrease by $8000

Sales, as the proportion of allocated fixed costs is same as sales proportion

Effect = (81-32)*1000 – 4000

= $45000

i.e. Profits will increase by $45000