Question

Canvas & Pearson ? Packback Voimail or NetD Single Sign On uired Assignment 6 Saved Soved Help Save & Exit Submit Check my work M7-7 (Algo) Analyzing Keep-or-Drop Decision (LO 7-2, 7-5) Blowing Sand Company produces the Drafty model fan, which currently has a net loss of $36,000 as follows: Sales revenue Less: Variable costs Contribution margin Less: Direct fixed costs Segment margin Less: Common fixed costs Net operating income (loss) Drafty Model $300,000 210, eee $ 90, eee 84,000 $ 6,000 42,000 $(36,000) Eliminating the Drafty product line would eliminate $84,000 of direct fixed costs. The $42,000 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 model is eliminated? By how much? Total Profit + by

Answer 1

Here, the contribution margin =$ 90,000

Total fixed cost = 84,000 + 42,000 = $ 126,000

So, the contribution margin is not enough to compensate for the fixed costs that are being generated. But it is still positive.

So, if the segment is eliminating its direct fixed cost by $ 84,000, then the new direct fixed cost = 84,000 - 84,000 = $ 0

But since the common fixed cost is permanent and is just being redistributed, it will stay intact.

Since, the operation is discontinued, the contribution margin becomes 0.

So, the only thing remains is the common fixed cost which is a outflow of cash. So after eliminating, the new losses will be = common fixed cost = $ 42,000

So, the profit would decrese by 42,000 - 36,000 = $ 6,000