Answer:
a) Net income lost from discontinuation $235,000
b) Canoe should not be discontinued because a sum worth $235,000 generated by canoe would be lost if it is discontinued.
Explanation:
If canoe is discontinued the net income lost will be calculated as follows:
$
Sales revenue 2,600,000
Variable cost <u> (1,870,000)</u>
Contribution 730,000
Direct fixed cost <u>(495,000)</u>
Net income lost <u>235,000
</u>
a) Net income lost from discontinuation $235,000
b) Canoe should not be discontinued because a sum worth $235,000 generated by canoe would be lost if it is discontinued.
Note that the indirect fixed cost is not associated with the production of canoe , therefore whether or not canoe is produced it will still be incurred either way.
The direct fixed costs are associated with production of canoe hence, they are subtracted.
