Question

M7-7 Analyzing Keep-or-Drop Decision (LO 7-2,7-5) Blowing Sand Company produces the Drally model fan, which currently has a net loss of $50,000 as follows: Sales revenue Less: Variable costs Contribution margin Less: Direct fixed costs Segment margin Less: Common fixed costs Net operating income (loss) Dratty Model $240.000 168.000 $ 72.000 59.000 $ 13.000 72.000 $ 69,000 Eliminating the Drafty product line would eliminate $59,000 of direct fixed costs. The $72,000 of common fixed costs would be redistributed to Blowing Sand's remaining product lines. Wil Blowing Sand's net operating income increase or decrease if the Drafty model is eliminated? By how much? Total Profit

Answer 1

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ANS+M7-1: Total Dxo fit [Decneate] by $ 13000 * Reason ; laj lf Blowing sand company eliminates the dreafty - product, the common fixed cost would remain same for the company. Even if the same fixed cost - Me distributed to Other products, the company's overall profit will reduce by $72000 (common fixed cost). (6) By doing the drafty model fan the company's overare profit reducing by $59000. Cafter absorbing $ 72000 as common fixed cost) · - Hence, if Blowing sand company eliminates the drafty product, the total profit will decreas by $13,000 - C$12000-$59000)

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ANS+M7-1: Total Dxo fit [Decneate] by $ 13000 * Reason ; laj lf Blowing sand company eliminates the dreafty - product, the common fixed cost would remain same for the company. Even if the same fixed cost - Me distributed to Other products, the company's overall profit will reduce by $72000 (common fixed cost). (6) By doing the drafty model fan the company's overare profit reducing by $59000. Cafter absorbing $ 72000 as common fixed cost) · - Hence, if Blowing sand company eliminates the drafty product, the total profit will decreas by $13,000 - C$12000-$59000)