Pick A Citrus has two product lines Apples and Lemons. Each is managed as a sepa
ID: 2435475 • Letter: P
Question
Pick A Citrus has two product lines Apples and Lemons. Each is managed as a separate division. Common costs are allocated based upon Sales Revenue. If Lemons are dropped and the accounting statement is operating within its relevant range what will be the change in profits for the company as a whole?
Pick A Citrus has two product lines Apples and Lemons. Each is managed as a separate division. Common costs are allocated based upon Sales Revenue. If Lemons are dropped and the accounting statement is operating within its relevant range what will be the change in profits for the company as a whole?
Apples Lemons Total Sales $6,000 $50,000 $56,000 Less: Direct Materials 2,000 25,000 27,000 Direct Labor 500 6,000 6,500 Variable Overhead 300 4,000 4,300 Contribution Margin $3,200 $15,000 $18,200 Less: Controllable Fixed Costs 200 3,000 3,200 Controllable Segment Margin $3,000 $12,000 $15,000 Less: Salaries 500 3,000 3,500 Segment Margin $2,500 $ 9,000 $11,500 Common Costs (% of Sales) 600 4,000 4,600 Net Income $1,900 $ 5,000 $ 6,900A. Decrease of $15,000. B. Decrease of $12,000. C. Decrease of $9,000. D. Decrease of $5,000. E. None of the above is correct.
Explanation / Answer
If product Lemon is dropped then common cost borne by product Lemon would be borne exclusively by product Apple and as such it will incurr as loss of $2,100 ($1,900 - $4,000) against total net income of $6,900. So total income will decrease by $2,100 + $6,900 = $9,000
C. Decrease of $9,000.