Lenovo Inc. is considering discontinuing their Thinkpad laptop division, because

Question

Lenovo Inc. is considering discontinuing their Thinkpad laptop division, because it is reporting a loss. Currently, Thinkpad is generating sales of $200,000, with variable costs of $150,000 and

fixed costs of $80,000. Therefore, it is reporting a loss of $30,000. Is Lenovo correct in discontinuing the Thinkpad division?

a.Yes, because the company’s net income will increase by $30,000 if discontinued

b. No, because the company’s net income will decrease by $25,000 if discontinued

c. No, because the company’s net income will decrease by $50,000 if discontinued

d. Yes, because the Thinkpad is an awful laptop

e. None of the above

Please explain why

Explanation / Answer

C. No. because the company's net income will decrease by $50,000 if discontinued.

The fixed cost will remain constant in any level of product.( except some occations.).. When we decide about the discontinuation of a product line we must take into cosdideration only the variable cost not the fixed cost.The contribution from thinkpad division is $50,000. Here the thinkpad division absorbs 50000 fixed cost.

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.