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Sophie Company is considering closing one of its product lines. Current data on the product line are as follows.



Sales revenue $27,000

Variable costs 19,000

Direct avoidable fixed costs* 5,000

Indirect allocated fixed costs** 7,000

Net Income (Loss) on the product line ($4,000)



*The direct avoidable fixed costs will be eliminated if the product line is closed.

**The indirect allocated fixed costs will remain the same whether the product line is continued or closed.



Assume that Sophie decides to discontinue this product line. By how much will overall company net income change?

Company net income will DECREASE by $3,000 if the product line is discontinued.
Company net income will INCREASE by $3,000 if the product line is discontinued.
Company net income will INCREASE by $4,000 if the product line is discontinued.
Company net income will DECREASE by $4,000 if the product line is discontinued.



Answer :

To determine how much the overall company net income will change if the product line is discontinued, we need to calculate the impact of discontinuing the product line on the company's net income.

Currently, the product line is incurring a loss of $4,000. If the product line is discontinued, the direct avoidable fixed costs of $5,000 associated with the product line will be eliminated. However, the indirect allocated fixed costs of $7,000 will remain the same.

Net income impact of discontinuing the product line:
Net income impact = Net Income (Loss) - Direct Avoidable Fixed Costs
Net income impact = (-$4,000) - $5,000
Net income impact = -$9,000

Therefore, if the product line is discontinued, the overall company net income will decrease by $9,000, not $3,000 or $4,000 as given in the options provided.

The closest option to the correct answer is:
Company net income will DECREASE by $4,000 if the product line is discontinued.

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