Xander's Muffins is trying to decide whether or not to continue a particular muffin flavour. The information shown is available for Xander's different muffin ranges. If the range is dropped, the business will not pay the direct fixed costs, but will still have the allocated common fixed costs. Blueberry Raspberry white chocolate Banana walnut Sales volume 500 units 500 units 500 units Sales price $4 per unit $5 per unit $4.50 per unit Variable costs $1.50 per unit $1.75 per unit $1.25 per unit Direct fixed costs 1,000 1,000 1,000 Allocated common fixed costs 500 1500 500 Net income -250 -875 125 What will be the total net profit if the business drops the Blueberry muffins?
Question
Xander's Muffins is trying to decide whether or not to continue a particular muffin flavour. The information shown is available for Xander's different muffin ranges. If the range is dropped, the business will not pay the direct fixed costs, but will still have the allocated common fixed costs.
Blueberry Raspberry white chocolate Banana walnut Sales volume 500 units 500 units 500 units Sales price 5 per unit 1.50 per unit 1.25 per unit Direct fixed costs 1,000 1,000 1,000 Allocated common fixed costs 500 1500 500 Net income -250 -875 125
What will be the total net profit if the business drops the Blueberry muffins?
Solution
To calculate the total net profit if the business drops the Blueberry muffins, we need to consider the net income from the remaining muffin ranges (Raspberry white chocolate and Banana walnut) and the savings from not having to pay the direct fixed costs for the Blueberry muffins.
Step 1: Calculate the total net income from the remaining muffin ranges.
Net income from Raspberry white chocolate = -125
Total net income from remaining muffin ranges = -125 = -$750
Step 2: Calculate the savings from not having to pay the direct fixed costs for the Blueberry muffins.
Savings from not having to pay the direct fixed costs for the Blueberry muffins = $1,000
Step 3: Calculate the total net profit if the business drops the Blueberry muffins.
Total net profit = Total net income from remaining muffin ranges + Savings from not having to pay the direct fixed costs for the Blueberry muffins
Total net profit = -1,000 = $250
So, if the business drops the Blueberry muffins, the total net profit will be $250.
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