A company has three product lines, one of which reflects the following results: Sales $235000 Variable expenses 135000 Contribution margin 100000 Fixed expenses 130000 Net loss $ (30000) If this product line is eliminated, 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. If management decides to eliminate this product line, the company’s net income will

If management decides to eliminate this product line, the company’s net income will reduce by $22,000

Explanation:

A product should be shut down if doing so would make the savings in fixed costs associated with the product to exceed the lost contribution. Other wise , the product should remain.

In a shut down decision , the following relevant cash flows should be considered:

                                                                                                           $                                                                                            

Lost contribution from shut down                                        (100,000)

Savings in fixed cost (60% × 130,000)                                  78,000

Net loss from shut down                                                        (22,000)

Net loss from shut down = $(22,000)

If management decides to eliminate this product line, the company’s net income will reduce by $22,000

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