Question

Please show detailed work

Exercise E

Analysis of Hair Care Company’s citrus hair conditioner reveals that it is losing $5,000

annually. The company sells 5,000 units of citrus hair conditioner each year at $10 per unit. Variable

costs are $6 per unit. None of the company’s fixed costs would be saved if the citrus hair conditioner

were eliminated. What would be the increase or decrease in company net income if citrus hair

condition were eliminated?

Exercise F

The luggage department of Sampson Company has revenues of $1,000,000; variable

expenses of $250,000; direct fixed costs of $500,000; and allocated, indirect fixed costs of $300,000

in an average year. If the company eliminates this department, what would be the effect on net

income?

Answer 1

Exercise E

Sales (5,000 x 10) = $50,000

Variable cost (5,000 x 6) = $30,000

Contribution margin= Sales - Variable cost

= 50,000-30,000

= $20,000

Loss = $5,000

Fixed cost = Contribution margin + Loss

= 20,000+5,000

= $25,000

If citrus hair conditioner is eliminated, its impact on profit will be as under:

Loss of contribution margin	-20,000
Saving in finished goods	25,000
Increase in income	$5,000

Hence, income would increase by $5,000 if citrus hair conditioner is eliminated.

Exercise F

Differential Analysis
	Continue with Luggage Department	Eliminate Luggage Department	Effect on Income
Sales	1,000,000	0	-1,000,000
Variable cost	-250,000	0	250,000
Direct fixed costs	-500,000	0	500,000
Indirect fixed costs	-300,000	-300,000	0
Net Income	-$50,000	-$300,000	-$250,000

Hence, if luggage department is eliminated, income would decrease by $250,000.

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