Question

7. The management accountant for Giada's Book Store has prepared the following income statement for the most current year: Cookbook Travel Book Classics Total Sales $65,000 $164,000 $55,000 $284,000 Cost of goods sold 37,000 67,000 20,000 124,000 Contribution margin 28,000 97,000 35,000 160,000 Order and delivery processing 21,000 25,000 11,000 57,000 Rent (per sq. foot used) 5,000 4,000 4,000 13,000 Allocated corporate costs 10,000 10,000 10,000 30,000 Corporate profit $ (8,000) $58,000 $10,000 $60,000 If the travel book line had been discontinued, corporate profits for the current year would have decreased by ________. A) $97,000 B) $72,000 C) $68,000 D) $58,000

Answer 1

If the travel book line at Giada's Book Store were discontinued, the corporate profits for the current year would decrease by $58,000. This figure is obtained by subtracting the variable costs associated with the travel book line from its contribution margin.

Step-by-step explanation:

The question asks how corporate profits would have changed if the travel book line had been discontinued at Giada's Book Store. Evaluating the impact on corporate profits involves identifying the contribution margin that would be lost along with any variable costs that would also be eliminated if the travel book line were discontinued. The income statement shows a contribution margin of $97,000 for the travel book line, with additional order and delivery processing costs of $25,000, rent of $4,000, and allocated corporate costs of $10,000. To calculate the impact on corporate profits, we subtract the sum of these expenses from the contribution margin: $97,000 (contribution margin) - ($25,000 + $4,000 + $10,000) (variable expenses) = $58,000. Therefore, the decrease in corporate profits would be $58,000, which corresponds to option D.

Answer 2

The correct answer is B.

Step-by-step explanation:

Giving the following information:

Travel Book

Sales= $164,000

Cost of goods sold= (67,000)

Contribution margin= 97,000

Order and delivery processing (25,000)

Net income= 72,000

Rent and allocated corporate costs remain constant in both decisions (drop or not). Therefore, they are irrelevant.

Now, if the travel book product line was discontinued, the company's net income would have decreased by $72,000