ICAEW BIP · Chapter 12 · Question 6 of 7
A product line earns a contribution of £45,000 a year and is charged fixed costs of £60,000, so it shows a loss of £15,000. Of these fixed costs, £20,000 would be saved if the product line were closed. The rest are general overheads that would be reallocated to other products. What would be the effect on company profit of closing the product line?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Profit would fall by £25,000
Explanation
Closing loses contribution of £45,000 and saves avoidable fixed costs of £20,000, so profit falls by £25,000. The other £40,000 of general overheads would still be incurred and so is irrelevant. The reported loss is misleading because it includes unavoidable allocated costs.
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