Blowing Sand Company produces the Drafty model fan, which currently has a net lo
ID: 2540808 • Letter: B
Question
Blowing Sand Company produces the Drafty model fan, which currently has a net loss of $36,000 as follows: Drafty Model $300,000 210,000 $90,000 84,000 6,000 Sales revenue Less: Variable costs Contribution margin Segment margin Net operating income (loss) Less: Direct fixed costs Less: Common fixed costs $(36,000) Eliminating the Drafty product line would eliminate $84,000 of direct fixed costs. The $42,000 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? Profit byExplanation / Answer
Answer:- Total Segment margin will decrease by $6000 or total net operating loss will increase by 6000 (ie- from $36000 to $42000).
Explanation:-Common fixed costs will continue to occur whether product are eliminated or not, hence it is not a part of decision making process.
Blowing Sand Company Income Statement Particulars Current Proposed (Eliminated) $ $ Sales 300000 0 Less:- Variable costs 210000 0 Contribution margin 90000 0 Less:-Direct fixed costs 84000 0 Segment margin 6000 0 Less:-Common fixed costs 42000 42000 Net Opreating income (loss) -36000 -42000