Sophie Company is considering closing one of its product lines. Current data on
ID: 2498722 • Letter: S
Question
Sophie Company is considering closing one of its product lines. Current data on the product line are as follows.
Sales revenue $25,000
Variable costs 19,000
Direct avoidable fixed costs* 7,000
Indirect allocated fixed costs** 5,000
Net Income (Loss) on the product line ($6,000)
*The direct avoidable fixed costs will be eliminated if the product line is closed.
**The indirect allocated fixed costs will remain the same whether the product line is continued or closed.
IN ADDITION, if Sophie closes the product line, Sophie can sublease its production facility to another company and earn sublease revenue of $1,500 per year.
Assume that Sophie decides to discontinue this product line. By how much will overall company net income change?
Company net income will INCREASE by $6,000 if the product line is discontinued.
Company net income will DECREASE by $6,000 if the product line is discontinued.
Company net income will INCREASE by $2,500 if the product line is discontinued.
Company net income will DECREASE by $1,000 if the product line is discontinued.
Company net income will DECREASE by $2,500 if the product line is discontinued.
Company net income will INCREASE by $1,000 if the product line is discontinued.
Company net income will INCREASE by $6,000 if the product line is discontinued.
Company net income will DECREASE by $6,000 if the product line is discontinued.
Company net income will INCREASE by $2,500 if the product line is discontinued.
Company net income will DECREASE by $1,000 if the product line is discontinued.
Company net income will DECREASE by $2,500 if the product line is discontinued.
Company net income will INCREASE by $1,000 if the product line is discontinued.
Explanation / Answer
C) Company net income will INCREASE by $2,500 if the product line is discontinued.
Explanation:
Net Income = Sales revenue - Variable costs - Indirect allocated fixed costs
= $25,000 - 19,000 - 5,000
=$1,000
Company Net Income = $1,000 + $1,500 per year company can earn sublease revenue
=$2,500
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