Sunshine Products is a multiproduct firm. The revenues of a single product are $200 000 when 10 000 units are sold. Variable costs are $16 per unit. Direct fixed expenses of $25 000 consist primarily of depreciation on equipment specialised to the product. By what amount will Sunshine Products' cash flow change if the product is dropped?

A) $200 000 decrease
B) $160 000 decrease
C) $40 000 decrease
D) $15 000 decrease

Question

Hannah Belikoff · Accepted Answer

Final Answer : C, Explanation :  If the product is dropped, Sunshine Products will lose the contribution margin, which is the revenue minus variable costs. The contribution margin is ($200,000 - $160,000) = $40,000. The direct fixed expenses are non-cash expenses, so they do not affect cash flow. Therefore, the cash flow will decrease by $40,000.

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