Question

Marinette Company makes several products, including canoes. The company has been experiencing losses from its canoe segment and is considering dropping that product line. The following information is available regarding its canoe segment. MARINETTE COMPANY Income Statement—Canoe Segment Sales $ 2,000,000 Variable costs Direct materials $ 450,000 Direct labor 500,000 Variable overhead 300,000 Variable selling and administrative 200,000 Total variable costs 1,450,000 Contribution margin 550,000 Fixed costs Direct 375,000 Indirect 300,000 Total fixed costs 675,000 Net income $ (125,000) If canoes are discontinued, calculate the net income lost or gained.

Answer 1

If the canoe segment is discontinued a net income of $175,000 would be lost as shown in the relevant costing analysis below

Step-by-step explanation:

In determining whether or not to drop the canoe segment ,we would consider only costs incurred as a result of operating the canoe department ,hence cost not directly related to canoe would still expended when canoe segment is no more:

Segment sales $2,000,000

variable costs:

Direct materials ($450,000)

direct labor ($500,000)

Variable overhead ($300,000)

variable selling & admin ($200,000)

contribution $550,000

direct fixed costs ($375,000)

net income gained $175,000

If the canoe segment is discontinued a net income of $175,000 would be lost