Molly, Inc. is considering eliminating one of its product lines. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. What financial effects occur if the product line is discontinued?
A)net income will decrease by the amount of the contribution margin of the product line being discontinued
B)the company's total fixed costs will increase
C)total fixed costs will decrease by the amount of the product line's fixed costs
D)net income will decrease by the amount of the product line's fixed costs

Question

Quizplus · Accepted Answer

If the product line is discontinued, the contribution margin it generates will be lost, leading to a decrease in net income by that amount. The fixed costs will be reallocated, not eliminated, so they do not affect net income directly.