Question

Lambert, Inc. manufactures several types of accessories. For the year, the knit hats and scarves line had sales of $400,000, variable expenses of $310,000, and fixed expenses of $120,000. Therefore, the knit hats and scarves line had a net loss of $30,000. If Lambert eliminates the knit hats and scarves line, $20,000 of fixed costs will remain. Prepare an analysis showing whether the company should eliminate the knit hats and scarves line. Eliminate Sales Variable costs Contribution margin Fixed costs Net income Continue $400,000 310,000 90,000 120,000 $(30,000) Net Income Increase (Decrease) $(400,000) 310,000 (90,000) 100,000 $ 10,000 20,000 $(20,000)

Answer 1

(1) if the scarve line is eliminated we will prepare incremental analysis and determine whether the line should be continued or eliminated.

	continue	eliminate	Increase(decrease) in net income if eliminated
sales	$400,000	0	($400,000)
variable costs	$310,000	0	$310,000
contribution margin	$90,000 [400000-310000]	0	($90,000)
fixed cost	$120,000	$20,000 (will continue to occur)	$100,000[120000-20000]
Net income	($30,000)	($20,000)	$10,000

Thus, if the line is eliminated it would increase income by $10,000

hence, company should eliminate the hats and scarves line.