Which of the following are valid reasons for eliminating a product line?
I.The product line's contribution margin is negative.
II.The product line's traceable fixed costs plus its allocated common corporate costs are less than its contribution margin.
A)Only I
B)Only II
C)Both I and II
D)Neither I nor II

Question

Which of the following are valid reasons for eliminating a product line? 
I.The product line's contribution margin is negative.
II.The product line's traceable fixed costs plus its allocated common corporate costs are less than its contribution margin.
A)Only I
B)Only II
C)Both I and II
D)Neither I nor II

Quizplus · Accepted Answer

A negative contribution margin indicates that the product line is not covering its variable costs, leading to a loss, which is a valid reason for elimination. However, II is not valid because if traceable fixed costs plus allocated common costs are less than the contribution margin, the product line is still contributing positively to covering fixed costs and generating profit.

Which of the Following Are Valid Reasons for Eliminating a Product