Marinette Company makes several products, including canoes. The company has been experiencing losses from its canoe segment and is considering dropping that product line. The following information is available regarding its canoe segment.

Sales $3,300,000

Variable costs

Direct materials $710,000

Direct labor 760,000

Variable overhead 560,000

Variable selling and administrative 330,000

Total variable costs 2,360,000

Contribution margin 940,000

Fixed costs

Direct 635,000

Indirect 560,000

Total fixed costs 1,195,000

Net income $ (255,000)

Required:

If canoes are discontinued, calculate the net income lost or gained.

If canoes are discontinued, the net income lost will be in total $560,000 and additional $305,000.

Explanation:

Fixed costs are those costs which remained fixed whatever the level of activity. It does not change with the change in activity like sales, production etc.

The direct fixed costs are those which is directly associated with an activity and which causes due to that activity, if we stop or abandon that activity. we can save this cost.

On the other hand indirect costs are those cost which is allocated to the activity on some allocation basis, But it is not avoidable if you stop that activity.

In this question dropping product line will save all the variable and direct fixed cost, just indirect fixed will have to face by the company.

After dropping company has to face a loss of $560,000 for indirect cost.