Question

Analysis of Hair Care Company’s citrus hair conditioner reveals that it is losing $5,000 annually. The company sells 5,000 units of citrus hair conditioner each year at $10 per unit. Variable costs are $6 per unit. None of the company’s fixed costs would be saved if the citrus hair conditioner were eliminated. What would be the increase or decrease in company net income if citrus hair condition were eliminated?

Answer 1

Effect on income= -$20,000

Step-by-step explanation:

Giving the following information:

Analysis of Hair Care Company’s citrus hair conditioner reveals that it is losing $5,000 annually. The company sells 5,000 units of citrus hair conditioner each year at $10 per unit. Variable costs are $6 per unit.

If the total contribution margin is positive, the citrus hair conditioner elimination will not reflect a positive effect on net income, because none of the fixed costs will be eliminated.

Total contribution margin= 5,000* (10 - 6)= $20,000

Now we know that fixed costs are $25,000 (it is causing the $5,000 loss).

Effect on income= -$20,000

It is already loosing $5,000