Lenovo Inc is considering discontinuing their Thinkpad lapto

Lenovo Inc. is considering discontinuing their Thinkpad laptop division, because it is reporting a loss. Currently, Thinkpad is generating sales of $200,000, with variable costs of $150,000 and

fixed costs of $80,000. Therefore, it is reporting a loss of $30,000. Is Lenovo correct in discontinuing the Thinkpad division?

a.Yes, because the company’s net income will increase by $30,000 if discontinued

b. No, because the company’s net income will decrease by $25,000 if discontinued

c. No, because the company’s net income will decrease by $50,000 if discontinued

d. Yes, because the Thinkpad is an awful laptop

e. None of the above

Please explain why

Solution

C. No. because the company\'s net income will decrease by $50,000 if discontinued.

The fixed cost will remain constant in any level of product.( except some occations.).. When we decide about the discontinuation of a product line we must take into cosdideration only the variable cost not the fixed cost.The contribution from thinkpad division is $50,000. Here the thinkpad division absorbs 50000 fixed cost.