Problem

Refer to Flyaway Company, which produces window fans.Analyzing Unprofitable Business Segme...

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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