Molly Inc.is considering eliminating one of its product lines.The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance.What financial effects occur if the product line is discontinued?
A)The company's total fixed costs will increase
B)Total fixed costs will decrease by the amount of the product line's fixed costs
C)Net profit will decrease by the amount of the contribution margin of the product line being discontinued
D)Net profit will decrease by the amount of the product line's fixed costs

Question

Quizplus · Accepted Answer

Fixed costs will remain the same overall since they will be reallocated to other product lines, not eliminated. The net profit will decrease by the amount of the contribution margin of the discontinued product line, as this is the revenue lost minus the variable costs saved by discontinuing the product.

Molly IncIs Considering Eliminating One of Its Product Lines