Extreme Sports sells logo sports merchandise. The company is contemplating whether or not to continue its custom embroidery service. All of the company’s direct fixed costs can be avoided if a segment is dropped. This information is available for the segments.

A. What will be the impact on net income if the embroidery segment is dropped?

B. Assume that if the embroidery segment is dropped, apparel sales will increase 10%. What is the impact on the contribution margin and net income solely for the apparel?

C. Identify one cost that is not relevant in this analysis.

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Sales Variable costs Contribution margin Direct fixed costs Allocated common fixed costs Net income Custom Embroidery $60,000 30,000 30,000 22,000 12,000 $(4,000) Logo Apparel $250,000 110,000 140,000 40,000 50,000 $ 50,000