Sunshine Products is a multiproduct firm. The revenues of a single product are $200 000 when 10 000 units are sold. Variable costs are $16 per unit. Direct fixed expenses of $25 000 consist primarily of depreciation on equipment specialised to the product. By what amount will Sunshine Products' cash flow change if the product is dropped?

Question

Quizplus · Accepted Answer

If the product is dropped, Sunshine Products will lose the contribution margin, which is the revenue minus variable costs. The contribution margin is ($200,000 - $160,000) = $40,000. The direct fixed expenses are non-cash expenses, so they do not affect cash flow. Therefore, the cash flow will decrease by $40,000.

Sunshine Products Is a Multiproduct Firm