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27 August, 07:22

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. increase by $40,000.

b. decrease by $90,000.

c. decrease by $12,000.

d. increase by $12,000.

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Answers (1)
  1. 27 August, 07:56
    0
    The correct answer is C.

    Explanation:

    Giving the following information:

    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.

    Effect on income = - contribution loss + fix costs save

    Effect on income = - 90,000 + 78,000 = - 12,000

    Income will decrease by $12,000
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