Diva Footwear is contemplating if it should continue producing platform shoes.The following information is available for the company's segments. $\begin{array}{lrrr}&\text { Platform Shoes }&\text { Athletic Shoes }&\text { Boots }\\hline
\text { Sales } & \$ 120,000 & \$ 420,000 & \$ 360,000 \
\text { Variable costs } & 64,000 & 220,000 & 140,000\\text { Contribution margin } & 56,000 & 200,000 & 220,000 \
\text { Direct fixed costs } & 45,000 & 70,000 & 90,000 \
\text { Allocated fixed costs } & 20,000 & 70,000 & 60,000 \\text { Net income }&(\$9,000)&\$60,000&\$70,000
\end{array}$ If platform shoes are dropped, what effect will occur to Diva Footwear's net income?
A)Increase by $9,000
B)Decrease by $56,000
C)Decrease by $11,000
D)Increase by $56,000

Question

Quizplus · Accepted Answer

If platform shoes are dropped, the company will lose their contribution margin of $56,000 but will save on direct fixed costs of $45,000. The allocated fixed costs of $20,000 will likely be reallocated to other segments or remain as a company expense, not providing any net savings. Therefore, the net income will decrease by $11,000 ($56,000 - $45,000).

Diva Footwear Is Contemplating If It Should Continue Producing Platform