Principles of Accounting Volume 2
19th Edition
ISBN: 9781947172609
Author: OpenStax
Publisher: OpenStax College
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Textbook Question
Chapter 10, Problem 8PA
Extreme Sports sells logo sports merchandise. The company is contemplating whether or not to continue its custom embroidery service. All of the company’s direct fixed costs can be avoided if a segment is dropped. This information is available for the segments.
A. What will be the impact on net income if the embroidery segment is dropped?
B. Assume that if the embroidery segment is dropped, apparel sales will increase 10%. What is the impact on the contribution margin and net income solely for the apparel?
C. Identify one cost that is not relevant in this analysis.
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Stretch Inc. sells both yoga pants and yoga mats. Manager for Stretch are concerned about their operating losses. They are considering dropping their yoga mat product line. Operating income by product line and in total is shown below. 1) Prepare a new operating income analysis assuming Stretch will only sell yoga pants. 2) Then explain why Stretch should drop or not drop the yoga mat product line based on your analysis. All fixed costs are allocated fixed costs.
Income Statement for year ended December 31, 2020
Sales Revenue Total $425,000 Yoga Pants $299,000 Yoga Mats $126,000
Variable Costs $221,000 Yoga Pants $136,000 Yoga Mats $ 85,000
Contribution Margin $204,000 Yoga Pants 163,000 Yoga Mats $41,000
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Selling & Administrative Total $64,000 Yoga Pants $46,000 Yoga Mats $18,000
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Chapter 10 Solutions
Principles of Accounting Volume 2
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