Blowing Sand Company produces the Drafty model fan, which currently has a net loss of $38,000 as follows:
Drafty Model
Sales revenue $ 250,000
Less: Variable costs 175,000
Contribution margin $ 75,000
Less: Direct fixed costs 69,000
Segment margin $ 6,000
Less: Common fixed costs 44,000
Net operating income (loss) $ (38,000)
Eliminating the Drafty product line would eliminate $69,000 of direct fixed costs. The $44,000 of common fixed costs would be redistributed to Blowing Sand's remaining product lines.
Will Blowing Sand's net operating income increase or decrease if the Drafty model is eliminated? By how much?
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