Jordan Sports Company sells logo sports merchandise and does custom screen print

Question

Jordan Sports Company sells logo sports merchandise and does custom screen printing. They are trying to decide whether or not to continue screen printing. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the screen printing were dropped.
Screen Printing Apparel Sales
Sales $120,000 $420,000
Variable Costs 72,000 220,000
Contribution Margin 48,000 200,000
Direct Fixed Costs 32,000 70,000
Allocated Common Fixed costs 20,000 70,000
Net Income ($4,000) $60,000

Reference: Ref 7-3

If screen printing is dropped, apparel sales will be unaffected. All direct fixed costs associated with screen printing will be eliminated. What will the effect on overall profits be if the segment is eliminated?
Answer


Overall profits will increase $4,000

Overall profits will decrease by $48,000

Overall profits will decrease by $16,000

Overall profits will decrease by $120,000

Explanation / Answer

Screen Printing Apparel Sales Sales $120,000 $420,000 Variable Costs 72,000 220,000 Contribution Margin 48,000 200,000 Direct Fixed Costs 32,000 70,000 Net Contribution 16,000 130,000 Allocated Common Fixed costs 20,000 70,000 Net Income ($4,000) $60,000 There is a net contribution of $16,000 by Screen Printing. Which will not be available. And Allocated common Fixed cost will remain unchanged. Hence there will net decrease in profits $16,000. Answer Overall profits will decrease by $16,000

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