Tremaine Inc. has three product lines: A, B, and C. Management is considering dropping product line A. If it is discontinued, $14,000 of its fixed costs can be avoided. The discontinuation of product line A would:

Question

Tremaine Inc. has three product lines: A, B, and C.  Management is considering dropping product line A. If it is discontinued, $14,000 of its fixed costs can be avoided. The discontinuation of product line A would:

Quizplus · Accepted Answer

Dropping product line A will result in a loss of contribution margin from this product line, which is currently contributing $10,000 to net income ($80,000 in revenue less $70,000 in variable costs).

However, discontinuing product line A will also result in a reduction in fixed costs of $14,000, which will partially offset the loss of contribution margin.

Thus, the net effect on net income will be a decrease of $4,000 ($10,000 loss in contribution margin less $14,000 cost savings). Therefore, the correct answer is C.