Question

Eliminating the Drafty product line would eliminate $45,000 of direct fixed costs. The $78,000 of common fixed costs would be redistributed to Blowing Sand’s remaining product lines. Will Blowing Sand’s net operating income increase or decrease if the Drafty model is eliminated? By how much?

Answer 1

The Blowing's sand net income will increase by $45,000 by saving of direct fixed costs.

Step-by-step explanation:

Fixed costs are costs which remains unchanged irrespective of the level of activity produced by Blowing Sand's, means the Blowing Sand's will have to bear that cost whether it eliminate the Drafty product line or not. example factory rent, building depreciation etc.

Direct Fixed costs are those which only incurred when the units are produced so that will only incur costs when production is made.

So the elimination of Drafty product line will save $45,000 of direct fixed costs and the remaining $78,000 will be redistributed to other remaining product lines which will not impact the net income.