A company has three product lines, one of which reflects the following results:

Question

A company has three product lines, one of which reflects the following results: Sales $215,000 Variable expenses 125,000 Contribution margin 90,000 Fixed expenses 130,000 Net loss $ (40,000) 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

a. decrease by $12,000.

b. increase by $40,000.

c. increase by $12,000.

d. decrease by $90,000.

Explanation / Answer

Incremental revenue $215,000
Incremental Variable expenses 125,000

Current net income = -40000

Unavoidable fixed expense = 130000*40%= 52000

Net net income = 0-52000= -52000

Change in net income = -52000-(-40000)= -12000

c.   decrease by $12,000.

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