XYZ company has two product lines, wholesale and retail. The retail product line appears to be losing money, and is being considered for elimination. If the retail line is dropped, its salaries and other direct fixed costs can be avoided. In addition, sales of wholesale products can increase by 20%. Wholesale Retail Total Sales $1,100,000 $700,000 $1,800,000 Less variable costs 700,000 600,000 1,300,000 Contribution margin 400,000 100,000 500,000 Less direct fixed costs Salaries 175,000 175,000 350,000 Other 25,000 70,000 95,000 Less allocated fixed costs: Total 76,000 74,000 150,000 Total costs 276,000 319,000 595,000 Net Income $124,000 (219,000) $(95,000
(a) What would be the impact on overall profits if the retail line was dropped, with no other changes?
(b) Assume that if retail was dropped, wholesale sales would increase 20%. What would be the SEPARATE impact on net income as a result?
(c) What would be the COMBINED effect of the dropping the retail line? Should it be dropped?