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: $\begin{array} { l r r }
& \text { Baseball } & \text { Soccer } \
\text { Sales } & \$ 120,000 & \$ 420,000 \
\text { Variable costs } & 72,000 & 220,000 \
\text { Contribution margin } & 48,000 & 200,000 \
\text { Direct fixed costs } & 32,000 & 70,000 \
\text { Allocated common fixed costs } & 20,000 & 70,000 \\text { Net income }&(\$4,000)&\$60,000
\end{array}$ 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: $\begin{array} { l r r } 
& \text { Baseball } & \text { Soccer } \
\text { Sales } & \$ 120,000 & \$ 420,000 \
\text { Variable costs } & 72,000 & 220,000 \
\text { Contribution margin } & 48,000 & 200,000 \
\text { Direct fixed costs } & 32,000 & 70,000 \
\text { Allocated common fixed costs } & 20,000 & 70,000 \\text { Net income }&(\$4,000)&\$60,000
\end{array}$ 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

Eliminating the baseball segment would remove its contribution margin of $48,000 but also remove its direct fixed costs of $32,000. The allocated common fixed costs of $20,000 would remain unchanged, as they are not directly tied to the baseball segment. Therefore, the net effect on overall profits would be a decrease of $16,000 ($48,000 - $32,000).

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