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Superior Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales.
Superior Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2011 follows:
Audio | Video | Accelerators | Total | |
Sales | $1,045,000 | $2,255,000 | $2,200,000 | $5,500,000 |
Less COGS | 575,000 | 1,240,000 | 1,870,000 | 3,685,000 |
Gross margin | 470,000 | 1,015,000 | 330,000 | 1,815,000 |
Less other var costs | 53,000 | 69,000 | 20,000 | 142,000 |
Contribution margin | 417,000 | 946,000 | 310,000 | 1,673,000 |
Less direct salaries | 155,000 | 175,000 | 65,000 | 395,000 |
Less common fixed costs: | ||||
Rent | 11,970 | 25,830 | 25,200 | 63,000 |
Utilities | 4,370 | 9,430 | 9,200 | 23,000 |
Depreciation | 5,890 | 12,710 | 12,400 | 31,000 |
Other admin costs | 79,230 | 170,970 | 166,800 | 417,000 |
Net income | $160,540 | $552,060 | $31,400 | $744,000 |
Since the profit for accelerators is relatively low, the company is considering dropping this product line. What is the effect of dropping accelerators on total net income?
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