ADM 2341 Lecture Notes - Earnings Before Interest And Taxes, Fixed Cost, Income Statement
10 Jun 2013
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*common fixed cost = (350,000 - 180,000) + (410,000 - 180,000) * segment margin (sm) = cm - total traceable fixed costs. * operating income = segment margin - common fixed cost. = ,000: the old operating income without discontinuing product a is ,000. If we discontinue the production and sale of product a, we would lose the contribution margin of product a of ,000, or in other words, we would lose the sales, and gain the total variable costs of product a. We would save the total traceable fixed cost of ,000, and overall we would lose the segment margin of ,000. According to the quantitative analysis, our decision would be to not drop product a. The decrease in income would be the equivalent to the segment margin of the discontinued product a. The change in annual operating income due to this decision will be 150,000 230,000 = - 80,000.
