Homework Answers
| A | Income statement if Custom embroidery is eliminated | |||
| Custom embroidery | Logo Apparael | Total | ||
| Sales | $0 | $2,50,000 | $2,50,000 | |
| Variable costs | $0 | $1,10,000 | $1,10,000 | |
| Contribution margin | $0 | $1,40,000 | $1,40,000 | |
| Direct fixed costs | $22,000 | $40,000 | $62,000 | |
| Allocarted common fixed costs | $0 | $50,000 | $50,000 | |
| Net Income | -$22,000 | $50,000 | $28,000 | |
| So if Custom embroidery is dropped then the Net Income shall be $28,000 which is a $18,000 reduction | ||||
| B | Income statement if Custom embroidery is eliminated and increase in Logo's sales | |||
| Custom embroidery | Logo Apparael | Total | ||
| Sales | $0 | $2,75,000 | $2,75,000 | |
| Variable costs | $0 | $1,10,000 | $1,10,000 | |
| Contribution margin | $0 | $1,65,000 | $1,65,000 | |
| Direct fixed costs | $22,000 | $40,000 | $62,000 | |
| Allocarted common fixed costs | $0 | $50,000 | $50,000 | |
| Net Income | -$22,000 | $75,000 | $53,000 | |
| There is an decrease in Contribution margin from $170,000 to $165,000 which is a $5,000 decrease | ||||
| Net Income will increase by $7,000($53,000-$46,000) | ||||
| C | Direct Fixed cost is not relevant as it will be incurred irrespective of whether any product is dropped or not | |||
Answers are inconsistent. Letter C is correct. Hence, direct fixed costs should not be included. Consider the allocated fixed income since it is still included in the computation.
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