Question

Wildhorse has three product lines in its retail stores: flipflops, sandals, and slippers. Results of the fourth quarter are presented below:

Flipflops
Sandals
Slippers
Total
Units sold
1,220
2,440
2,440
6,100
Revenue
$24,400
$48,800
$30,500
$103,700
Variable departmental costs
20,740
26,840
14,640
62,220
Direct fixed costs
1,220
3,660
2,440
7,320
Allocated fixed costs
8,540
8,540
8,540
25,620
Net income (loss)
$(6,100)
$9,760
$4,880
$8,540
The allocated fixed costs are unavoidable. Demand of individual products are not affected by changes in other product lines.
What will happen to profits if Wildhorse discontinues the Flipflops product line?
If Wildhorse discontinues the Flipflops product line profit will select an option increasedecrease by $enter a dollar amount .

Answer 1

Discontinuing the Flipflops product line will decrease Wildhorse's profits by $6,100, as this amount represents the net loss that will be removed from the total profits.

Step-by-step explanation:

If Wildhorse discontinues the Flipflops product line, its profits will decrease by $6,100. This is calculated by looking at the net loss that the Flipflops product line is currently contributing. Although this product line shows a net income loss, it is important to consider that the allocated fixed costs of $8,540 are unavoidable and would be spread over the remaining products, which could in fact increase the costs allocated to the other product lines, potentially reducing overall profit regardless. However, the question's data indicates that the allocated fixed costs are not affected by changes in product lines, so the loss of the Flipflops line would mean the removal of this loss from the overall profit, resulting in a profit decrease of the net loss amount.