Question

If the product line is discontinued, $4,000 of the fixed costs would be avoided. Also, the freed-up capacity would generate $6,000 of additional contribution margin from the expansion of other product lines. If Courtney discontinues the product line, the effect on overall income will be

Answer 1

Courtney

Discontinued Product Line:

The overall income will increase by $10,000 ($4,000 + 6,000).

Step-by-step explanation:

In a decision to discontinue a product line, the relevant costs to consider are the avoidable costs. These are costs that will no longer be incurred when a line is discontinued. They are relevant to the decision, unlike costs that will not change as a result of the discontinued product line.

Incremental revenue that will be resulting from a discontinued product line is also relevant. For example, the additional contribution margin of $6,000 is relevant to the decision of whether to continue or discontinue the product line, all other things remaining equal.