Northwest Company presently has two products: compasses and maps. The company is considering discontinuing the compass line. The following financial information is available for these two products: Given this information, if Northwest discontinues the compass line, net income would:

Question

Northwest Company presently has two products: compasses and maps. The company is considering discontinuing the compass line. The following financial information is available for these two products:  Given this information, if Northwest discontinues the compass line, net income would:

Quizplus · Accepted Answer

To determine the impact on net income, we need to subtract the cost of goods sold (COGS) and operating expenses for compasses from their revenue, and then subtract the same for maps. The difference between the two will give us the net income.

For compasses:
Revenue = $400,000
COGS = $280,000
Operating expenses = $125,000

Net income for compasses = $400,000 - $280,000 - $125,000 = -$5,000 (loss)

For maps:
Revenue = $800,000
COGS = $400,000
Operating expenses = $270,000

Net income for maps = $800,000 - $400,000 - $270,000 = $130,000

If Northwest discontinues the compass line, their net income will only consist of the net income from maps, which is $130,000. Therefore, net income would decrease by the amount they were making as a loss from compasses, which is $5,000. Hence, the net impact on net income would be a decrease of $25,000 ($5,000 loss from compasses + $20,000 decrease in map revenue). Therefore, the correct answer is C, decrease by $25,000.

Northwest Company Presently Has Two Products: Compasses and Maps