Shine Bright Company has three product lines-D,E,and F.The following information is available:
$$\begin{array} { | l | r | r | r | }
\hline & { \text { D } } & { \text { E } } & { \text { F } } \
\hline \text { Sales } & \$ 60000 & \$ 38000 & \$ 26000 \
\hline \text { Variable costs } & 36000 & 18000 & 12000 \
\hline \text { Contribution margin } & 24000 & 20000 & 14000 \
\hline \text { Fixed expenses } & 12000 & 15000 & 16000 \
\hline \text { Profit (loss) } & \$ 12000 & \$ 5000 & \$ ( 2000 ) \
\hline
\end{array}$$
Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss.Assuming fixed costs are unavoidable,if Shine Bright Company drops product line F and does not replace it,what effect will this have on profit?

Question

Shine Bright Company has three product lines-D,E,and F.The following information is available:
$$\begin{array} { | l | r | r | r | } 
\hline &  { \text { D } } & { \text { E } } & { \text { F } } \
\hline \text { Sales } & \$ 60000 & \$ 38000 & \$ 26000 \
\hline \text { Variable costs } & 36000 & 18000 & 12000 \
\hline \text { Contribution margin } & 24000 & 20000 & 14000 \
\hline \text { Fixed expenses } & 12000 & 15000 & 16000 \
\hline \text { Profit (loss) } & \$ 12000 & \$ 5000 & \$ ( 2000 ) \
\hline
\end{array}$$
Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss.Assuming fixed costs are unavoidable,if Shine Bright Company drops product line F and does not replace it,what effect will this have on profit?

Quizplus · Accepted Answer

Dropping product line F will decrease total revenue by $37,000 (F's revenue of $63,000 minus its variable costs of $26,000) and decrease total variable costs by $23,000 (F's variable costs of $26,000 plus the $3,000 of common fixed costs allocated to F). However, because fixed costs are unavoidable, dropping product line F will not change fixed costs and will result in a decrease in profit of $14,000 ($37,000 revenue loss minus $23,000 cost savings). Therefore, profit will decrease by $14,000.

Shine Bright Company Has Three Product Lines-D,E,and F Shine Bright Company Is Thinking of Dropping Product Line F