Question - Maxley Markets Company sells logo sports merchandise and does custom embroidery. They are trying to decide whether or not to continue embroidery. 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 embroidery were dropped.
Embroidery Apparel Sales
Sales $120,000 $420,000
Variable Costs $90,000 $220,000
Contribution Margin $30,000 $200,000
Direct Fixed Costs $18,000 $70,000
Allocated Common Fixed Costs $20,000 $70,000
Net Income ($ 8,000) $ 60,000
(a) What would be the impact on profits if embroidery was dropped?
(b) Assume that if embroidery was dropped, apparel sales would increase 20%. What is the impact on contribution margin and net income?
(c) Give an example of a cost that is not relevant in this analysis.