Question

Wildhorse Inc. manufactures golf clubs in three models. For the year, the Penny Worth line has a net loss of $6,200 from sales of $225,000, variable costs of $202,500, and fixed costs of $28,700. If the Penny Worth line is eliminated, $15,100 of fixed costs will remain. Prepare an analysis showing whether the Penny Worth line should be eliminated. (If an amount reduces the net income then enter with a negative sign preceding the number eg. −15,000 or parenthesis, eg. (15,000).)

Answer 1

Keeping the Penny Worth line results in a lesser loss of $6,200 compared to eliminating it, which would incur a loss of $15,100; therefore, it should not be eliminated.

Step-by-step explanation:

To determine whether the Penny Worth line should be eliminated or not, we must compare the loss it currently incurs with the loss that would take place if it were discontinued. Currently, the net loss from operating the Penny Worth line is $6,200. This is calculated from the net sales of $225,000, minus variable costs of $202,500 and fixed costs of $28,700. If the line is eliminated, the company will be able to avoid all variable costs and some fixed costs, only incurring $15,100 of the fixed costs that are unavoidable. Therefore, if the line is eliminated, the company will save the variable costs of $202,500 but still have to pay $15,100 of fixed costs, leading to a net savings of $187,400 ($202,500 - $15,100). This means keeping the line results in a lesser loss ($6,200) compared to eliminating it, which would result in a loss of $15,100. Hence, it is financially better to keep the Penny Worth line.