A company has three product lines, one of which reflects the following results: $$\begin{array} { l r }
\text { Sales } & \$ 215,000 \
\text { Variable expenses } & 125,000 \
\text { Contribution margin } & 90,000 \
\text { Fixed expenses } & 130,000 \
\text { Net loss } & \$ ( 40,000 )
\end{array}$$ If this product line is eliminated, 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. If management decides to eliminate this product line, the company's net income will
A) increase by $40,000.
B) decrease by $90,000.
C) decrease by $12,000.
D) increase by $12,000.

Question

A company has three product lines, one of which reflects the following results: $$\begin{array} { l r } 
\text { Sales } & \$ 215,000 \
\text { Variable expenses } & 125,000 \
\text { Contribution margin } & 90,000 \
\text { Fixed expenses } & 130,000 \
\text { Net loss } & \$ ( 40,000 )
\end{array}$$ If this product line is eliminated, 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. If management decides to eliminate this product line, the company's net income will
A) increase by $40,000.
B) decrease by $90,000.
C) decrease by $12,000.
D) increase by $12,000.

Quizplus · Accepted Answer

Eliminating the product line removes its contribution margin of $90,000 but also removes 60% of its fixed expenses, which amounts to $130,000 * 0.60 = $78,000. The net effect is a decrease in net income by $90,000 - $78,000 = $12,000.

A Company Has Three Product Lines, One of Which Reflects