Question
1. Bright Sports has three product lines: football, basketball, and soccer. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2016 follows: Football Basketball Soccer Total Sales $600,000 $800,000 $400,000 $1,800,000 Cost of goods sold 260,000 400,000 230,000 890,000 Gross margin 340,000 400,000 170,000 910,000 Less other variable costs 85,000 120,000 80,000 285,000 Contribution margin 255,000 280,000 90,000 625,000 Less direct salaries 50,000 60,000 45,000 155,000 Less common fixed costs 85,000 100,000 55,000 240,000 Net income $120,000 $120,000 -$10,000 $230,000 Since the profit for soccer is relatively low, the company is considering dropping this product line. What is the incremental effect on net income of dropping soccer? Answer (change in income):
Explanation / Answer
1 Loss in Contribution margin -90000 Avoidable Direct salaries 45000 Change in income -45000 2 Cash flow 6% Factor PV Amount Year 0 -350000 1 -350000 Year 1 -60000 0.9434 -56604 Year 2 140000 0.89 124600 Year 3 210000 0.83962 176320 Year 4 130000 0.79209 102972 Total NPV -2712 No, this a not a good investment
