|Incremental decrease in profit if the ‘accessories’ product line is dropped
|New profit = Original operating income +/- Change in operating income =
|New profit(loss) = 2000 – 30000
|Dropping the accessories product line will result in a drop in operating income for the entire company from $2,000 to -$28000
|Allocated fixed costs called as common costs are costs that are not traceable to a particular product, service, product line, or segment. They are never relevant because the costs are assigned to a number of products. The total allocated fixed costs will remain the same total costs regardless of whether the product is dropped or not are not avoidable.
|Allocated fixed costs often make a segment look unprofitable, the company’s total profit will decrease when a product or segment is dropped because allocated fixed costs must be absorbed by other products.Each additional product drop causes the company to be worse off due to allocated fixed costs that continue to be a cost for a company. This process is called the cost allocation death spiral.