Question

The product line manager's $60,000 salary is avoidable as is the $20,000 of advertising. Of the administrative expenses, $10,000 is avoidable. The rest are general allocated expenses that will not change if the product is dropped. The rent expense is allocated to product lines based on sales and represents a share of the total cost for the building. If this product line is dropped, what will happen to the company's overall net income?

Answer 1

There will be a $34,000 drop in overall net income. The $124,000 contribution margin will be forfeited by the business. Only $90,000 of a fixed costs (salary, advertising, and administrative expenses) are avoidable, resulting in a $34,000 decrease in net income.

The contribution margin is what?

The total amount of revenue left over after overhead expenses to pay for fixed costs and turn a profit for the business is shown by the contribution margin, according to Knight. This could be viewed as the component of sales which helps to cover fixed expenses.

Contribution margin: Is it profitable?

While contribution margin is indeed the amount of revenue left over after deducting variable costs from revenue, gross margin is the profit that remains after the cost of goods marketed from revenue.

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