Refer to Flyaway Company, which produces window fans.
Analyzing Unprofitable Business Segment Decision
Suppose that Flyaway Company also produces the Windy model fan, which currently has a net loss of $40,000 as follows:
Windy Model | |
Sales revenue | $160,000 |
Less: Variable costs | 130,000 |
Contribution margin | $ 30,000 |
Less: Direct fixed costs | 20,000 |
Segment margin | $ 10,000 |
Less: Common fixed costs | 50,000 |
Profit | $ (40,000) |
Eliminating the Windy product line would eliminate $20,000 of direct fixed costs. The $50,000 of common fixed costs would be redistributed to Flyaway’s remaining product lines.
Determine whether Flyaway should eliminate the Windy fan line and explain why or why not.
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