Colonial North Manufacturing, 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) net income will decrease by the amount of the contribution margin of the product line being discontinued
B) the company's total fixed costs will increase by the amount of the contribution margin of the product line being discontinued
C) the company's total fixed costs will decrease by the amount of the product line's fixed costs
D) net income will decrease by the amount of the product line's fixed costs

Question

Quizplus · Accepted Answer

Discontinuing a product line will decrease net income by the amount of the contribution margin of that product line, as the fixed costs are reallocated rather than eliminated, and the variable costs and revenues directly associated with the product line cease.