Question

Marinette Company makes several products, including canoes. The company has been experiencing losses from its canoe segment and is considering dropping that product line. The following information is

Available regarding its canoe segment. Should management discontinue the manufacturing of canoes? Support your decision.

Income Statement—Canoe Segment

Sales . \(2,000,000

Variable costs

Direct materials . \)450,000

Direct labor 500,000

Variable overhead . 300,000

Variable selling and administrative 200,000

Total variable costs 1,450,000

Contribution margin 550,000

Fixed costs

Direct . 375,000

Indirect . 300,000

Total fixed costs . 675,000

Net income . $ (125,000)

Short answer

No, management did not discontinue. The net loss of the Company by keeping department is $125,000 which is less than the net profit in case of discontinue.

Step-by-step solution

Definition of net income

The net income is the income earned by the company after the deduction of all expenses.

calculation of net income

	Keep the Department	Eliminate the Department
Sales	$2,000,000
Less:
Direct Material	$450,000
Direct Labour	$500,000
Variable Overhead	$300,000
Variable Selling & Administrative	$200,000
Direct Fixed Cost	$375,000
Indirect Fixed Cost	$300,000	$300,000
Total Expenses	$2,125,000	$300,000
Net Income (Loss)	($125,000)	($300,000)

The company should keep the department because the loss of the company is minimized by keeping the department.