Macho Sports Company sells soccer and baseball merchandise. The company is trying to decide whether or not to continue the baseball merchandise given the decline in the demand and current loss of this product line. The following information is available for the segments: $\begin{array}{lrr}&\text { Baseball }&\text { Soccer }\
\text { Sales } & \$ 120,000 & \$ 420,000 \
\text { Variable costs } & 72,000 & 220,000 \
\text { Contribution margin } & 48,000 & 200,000 \
\text { Direct fixed costs } & 32,000 & 70,000 \
\text { Allocated common fixed costs } & 20,000 & 70,000 \
\text { Net income } & \$ 4,000) & \$ 60,000
\end{array}$ If the baseball segment is dropped, soccer sales will be unaffected. What will be the effect on overall profits if the baseball segment is eliminated?

Question

Macho Sports Company sells soccer and baseball merchandise. The company is trying to decide whether or not to continue the baseball merchandise given the decline in the demand and current loss of this product line. The following information is available for the segments: $\begin{array}{lrr}&\text { Baseball }&\text { Soccer }\
\text { Sales } & \$ 120,000 & \$ 420,000 \
\text { Variable costs } & 72,000 & 220,000 \
 \text { Contribution margin } & 48,000 & 200,000 \
\text { Direct fixed costs } & 32,000 & 70,000 \
\text { Allocated common fixed costs } & 20,000 & 70,000 \
\text { Net income } & \$ 4,000) & \$ 60,000
\end{array}$ If the baseball segment is dropped, soccer sales will be unaffected. What will be the effect on overall profits if the baseball segment is eliminated?

Quizplus · Accepted Answer

If the baseball segment is eliminated, the company will lose the contribution margin of $48,000 but save the direct fixed costs of $32,000, resulting in a net decrease in overall profits of $16,000. Allocated common fixed costs are not relevant as they will remain regardless of the decision.

Macho Sports Company Sells Soccer and Baseball Merchandise If the Baseball Segment Is Dropped, Soccer Sales Will Be