Question

A firm has just saved $36,000 in fixed costs by eliminating one of its unprofitable product lines. By dropping the product line, the firm has also seen its total company-wide contribution margin drop by $50,000. These data indicate that the firm has seen its net income ________ due to the product discontinuation.

Answer 1

The firm's net income has decreased by $14,000 due to the discontinuation of an unprofitable product line, after accounting for the savings of $36,000 in fixed costs and the $50,000 decrease in contribution margin.

Step-by-step explanation:

The student asked, “By dropping the product line, which resulted in a $36,000 savings in fixed costs and a $50,000 decrease in total company-wide contribution margin, what was the impact on the firm's net income due to the product discontinuation?” To respond to this question, we must perform a simple calculation. The net income would be the difference between the savings in fixed costs and the decrease in the contribution margin. This means:

• Savings in fixed costs: $36,000
• Decrease in contribution margin: $50,000
• Net effect on income: Savings - Decrease in contribution margin

So, we calculate $36,000 - $50,000 which equals a $14,000 decrease in net income.

Therefore, the firm has seen its net income decrease due to the product discontinuation.