Question

Blowing Sand Company produces the Drafty model fan, which currently has a net loss of $60,000 as follows: Drafty Model $340,000 238,00 $102.000 Sales revenue Lesst Variable costs Contribution margin Less: Direct fixed costs Segment margin Less: Common fixed costs Net operating income (loss) $ 14.ee 74,000 (60.000) Eliminating the Drafty product line would eliminate $88,000 of direct fixed costs. The $74.000 of common fixed costs would be redistributed to Blowing Sand's remaining product lines. Will Blowing Sand's net operating income increase or decrease if the Drafty modelis eliminated? By how much? Total Profit by

Answer 1

1 2 Sales 3 Less: Variable costs 4 Contribution margin 5 Less: Direct fixed costs 6 Segment margin 7 Less: Common fixed costs 8 Net Operating income (loss) Continuning Eliminating $ 340,000 $ $ 238,000 $ $ 102,000 $ $ 88,000 $ $ 14,000 $ $ 74,000 $ 74,000 $ 60,000 $ 74,000 9 10 If we continue, the loss is $60,000. 11 If we eliminate, the loss is $74,000. 12 So, net operating loss increased from $60,000 to $74,000. 14 Total profit decreases by $14,000 ($74,000-$60,000)

B lo 1 2 Sales 3 Less: Variable costs 4 Contribution margin 5 Less: Direct fixed costs 6 Segment margin 7 Less: Common fixed costs 8 Net Operating income (loss) Continuning Eliminating 340000 238000 =+B2-B30 88000 O =+B4-B5 74000 =+B7 =+B6-B7 =+C6-C7