Question - Jordan Sports Company sells logo sports merchandise and does custom screen printing. They are trying to decide whether or not to continue screen printing. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the screen printing were dropped.
|
Sales
|
Screen Printing
|
Apparel Sales
|
|
Variable Costs
|
$120,000
|
$420,000
|
|
Contribution Margin
|
72,000
|
220,000
|
|
Direct Fixed Costs
|
48,000
|
200,000
|
|
Allocated Common Fixed costs
|
32,000
|
70,000
|
|
Net Income
|
20,000
|
70,000
|
|
($4,000)
|
$60,000
|
1-If screen printing is dropped, apparel sales will be unaffected. All direct fixed costs associated with screen printing will be eliminated. What will the effect on overall profits be if the segment is eliminated?
a- Overall profits will decrease by $16,000
b- Overall profits will decrease by $120,000
c- Overall profits will decrease by $48,000
d- Overall profits will increase $4,000
2- Assume that more space will be allocated to apparel sales if screen printing is dropped. This will allow apparel sales to increase by 25%. What is the impact on gross profits of a 25% increase in apparel sales?
a- Gross profits will increase by $15,000
b- Gross profits will increase by $105,000
c- Gross profits will increase by $50,000
d- Gross profits will increase by $32,5000