Corn Crunchers has three product lines.Its only unprofitable line is Corn Nuts, the results of which appear below for 2013: $$\begin{array} { l r }
\text { Sales } & \$ 1,400,000 \
\text { Variable expenses } & 920,000 \
\text { Fixed expenses } & 600,000 \
\text { Net loss } & \$ ( 120,000 )
\end{array}$$ If this product line is eliminated, 30% of the fixed expenses can be eliminated.How much are the relevant costs in the decision to eliminate this product line?

Question

Corn Crunchers has three product lines.Its only unprofitable line is Corn Nuts, the results of which appear below for 2013: $$\begin{array} { l r } 
\text { Sales } & \$ 1,400,000 \
\text { Variable expenses } & 920,000 \
\text { Fixed expenses } & 600,000 \
\text { Net loss } & \$ ( 120,000 )
\end{array}$$ If this product line is eliminated, 30% of the fixed expenses can be eliminated.How much are the relevant costs in the decision to eliminate this product line?

Quizplus · Accepted Answer

The relevant costs are the variable expenses ($920,000) plus the unavoidable fixed expenses (70% of $600,000 = $420,000), totaling $1,340,000. However, the question asks for the relevant costs if the line is eliminated, which would be the avoidable fixed costs ($180,000) plus the variable costs ($920,000), totaling $1,100,000.

Corn Crunchers Has Three Product Lines If This Product Line Is Eliminated, 30% of the Fixed