Question

Marin company makes several products, including canoes. The company reports a loss from its canoe segment (see below). all its variable costs are avoidable, and $302,500 of its fixed costs are avoidable. Segment income (loss) sales $ 989,800 variable costs 707,000 contribution margin 282,800 fixed costs 343,000 income (loss) $ (60,200)

Should the segment be continued or eliminated?

Answer 1

To decide whether to continue or eliminate the canoe segment, Marin company must weigh the current segment loss against the avoidable fixed costs. After due calculation, it is found that The Marin company should eliminate the canoe segment due to the reported loss.

Step-by-step explanation:

To determine whether the Marin company should continue or eliminate its canoe segment, we need to analyze its financial situation. The segment currently has sales of $989,800 and variable costs of $707,000, yielding a contribution margin of $282,800. However, the segment also incurs fixed costs of $343,000, leading to a net loss of $60,200. If the company eliminates the segment, it can avoid $302,500 of these fixed costs.

Therefore, eliminating the segment would result in a reduction of loss from $60,200 to the remaining fixed costs that cannot be avoided, which are

$40,500 ($343,000 - $302,500).

If the segment is continued, it will continue to incur a loss of $60,200.

However, if the segment is eliminated, the company will incur a smaller loss of $40,500 since they can avoid a large portion of the fixed costs.

Therefore, eliminating the segment is the profit-maximizing decision because the company will reduce its losses compared to continuing the canoe segment.