Huskie Manufacturing has two major product lines, Black and Red. Income statements for the two product lines follow: Black Red Revenues $500,000 $400,000 Variable costs 300,000 150,000 Product line fixed costs 130,000 100,000 Allocated corporate fixed costs 120,000 90,000 Operating income (loss) $ (50,000) $60,000 If the Black product line were dropped, all of its product line fixed costs could be avoided. Should the Black product line be dropped, and why

Question

Amara Owens

Business

3 November, 06:46

Huskie Manufacturing has two major product lines, Black and Red. Income statements for the two product lines follow: Black Red Revenues $500,000 $400,000 Variable costs 300,000 150,000 Product line fixed costs 130,000 100,000 Allocated corporate fixed costs 120,000 90,000 Operating income (loss) $ (50,000) $60,000 If the Black product line were dropped, all of its product line fixed costs could be avoided. Should the Black product line be dropped, and why

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Elianna Morton · Answer 1

Black product line should not be dropped.

If the product line is dropped, this would reduce the Huskie's entire profit by $70,000.

Explanation:

To determine the the impact of dropping the Black product line, we will consider the relevant cash flows associated with decision. These include;

$

Lost contribution from dropping the product

(500,000 - 300,000) (200,000)

Savings in line fixed cost 130,000

Net contribution lost (70,000)

Going by the above analysis, it is obvious that Product line contributes $70,000 toward the recovering of the allocated corporate fixed cost of 210,000 i. e. (120,000 + 90,000).

Therefore, if the product kine is dropped, this would reduce the Huskie's entire profit by $70,000.

Black product line should not be dropped.