Lisah Inc. Manufactures Golf Clubs In Three Models For The Y

Lisah Inc Manufactures Golf Clubs In Three Models For The Year Th

Lisah, Inc., manufactures golf clubs in three models. For the year, the Big Bart line has a net loss of $3,500 from sales of $201,000, variable costs of $175,000, and fixed costs of $29,500. If the Big Bart line is eliminated, $20,000 of fixed costs will remain. Prepare an analysis showing whether the Big Bart line should be eliminated. (Enter negative amounts using either a negative sign preceding the number e.g., -45 or parentheses e.g., (45).)

Paper For Above instruction

The decision to continue or discontinue a product line hinges on understanding how the line's discontinuation will affect the company's overall profitability. In this case, analyzing the financial data for the Big Bart golf club line provides insight into whether its elimination is advantageous or detrimental to Lisah, Inc.

Initially, the Big Bart line's financial performance shows a net loss of $3,500. The sales revenue amount to $201,000, with variable costs totaling $175,000, which results in a contribution margin of $26,000 ($201,000 - $175,000). Fixed costs allocated to the line are $29,500, leading to its net operating loss.

To evaluate whether the line should be eliminated, it is important to consider the fixed costs that will remain regardless of the line's status. If the Big Bart line is discontinued, $20,000 of fixed costs will continue. Eliminating the line would remove its contribution margin of $26,000, but fixed costs that do not disappear will remain, reducing the net benefit or increasing the loss.

Calculating the impact of elimination:

- The contribution margin from the Big Bart line is $26,000.

- Fixed costs that will remain if the line is eliminated amount to $20,000.

- If discontinued, the company saves the variable costs and the fixed costs directly attributable to the line, i.e., $175,000 in variable costs, but still incurs $20,000 of fixed costs.

- The net change in income if the line is eliminated would be the contribution margin lost minus the fixed costs that will remain.

Elimination analysis:

Net income change = - (Contribution margin) + Fixed costs remaining

= - $26,000 + $20,000 = - $6,000

This indicates a net decrease in income of $6,000 if the Big Bart line is eliminated.

Hence, despite the line posting a net loss of $3,500, its elimination would lead to an additional loss of $6,000 from the fixed costs that would still remain. Therefore, discontinuing the Big Bart line would worsen overall profitability.

Conclusion:

Based on this analysis, maintaining the Big Bart line is the better financial choice. Eliminating it would decrease overall net income, primarily because fixed costs that would continue after elimination offset the savings from variable costs and contribution margin. Therefore, Lisah, Inc. should retain the Big Bart golf club line despite its recent losses.

This analysis exemplifies the importance of considering fixed costs and contribution margins rather than only net income when making product discontinuation decisions (Horngren et al., 2018).

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