A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. If the product line is discontinued
A) total net income will increase by the amount of the product line's fixed costs.
B) total net income will decrease by the amount of the product line's fixed costs.
C) the contribution margin of the product line will indicate the net income increase or decrease.
D) the company's total fixed costs will decrease.

Question

Quizplus · Accepted Answer

The contribution margin of the product line (revenue minus variable costs) will indicate the net income increase or decrease upon discontinuance. If the product line's contribution margin is positive, discontinuing it would reduce net income by that amount, as the fixed costs will still be incurred and allocated to other product lines.

A Company Is Considering Eliminating a Product Line