Kule,Inc.produces three different lines of car racks for transporting large,bulky items.
Total company net annual profit = $40,000
Included in the cost of goods sold is $12,000 of annual rent (a fixed cost)that is distributed equally among the three product lines.As a consultant to Kule,will you recommend that it drop the luggage rack line?
A)No,dropping the line will actually decrease overall net profits.
B)Yes,dropping the line will increase company net profits.
C)No,dropping the line will result in increased fixed costs.
D)Yes,dropping the line will reduce cost of goods sold and increase revenues.

Question

Kule,Inc.produces three different lines of car racks for transporting large,bulky items. 
Total company net annual profit = $40,000
Included in the cost of goods sold is $12,000 of annual rent (a fixed cost)that is distributed equally among the three product lines.As a consultant to Kule,will you recommend that it drop the luggage rack line?
A)No,dropping the line will actually decrease overall net profits. 
B)Yes,dropping the line will increase company net profits. 
C)No,dropping the line will result in increased fixed costs. 
D)Yes,dropping the line will reduce cost of goods sold and increase revenues.

Quizplus · Accepted Answer

Current net profit is $40,000.Dropping the luggage rack line will increase profit by $10,000 initially,but the fixed rent costs ($4,000)that are being covered by that line will have to be distributed to the other two lines.That means the cost of goods sold for each remaining line will increase by $2,000 (or $4,000/2).Cost of goods sold for the Bicycle line will increase to 112,000,resulting in profit of $28,000;cost of goods sold for the Ski line will increase to 142,000,resulting in a profit of $18,000.Total profit will be $46,000,or $6,000 more than if the company kept the Luggage line.Therefore,Kule should drop the line.

Kule,IncProduces Three Different Lines of Car Racks for Transporting Large,bulky