To determine the impact on profit if the company discontinues the segment, we need to calculate the change in overall profit, factoring in the contribution margin and any fixed costs that will be saved.

Given Information:

• Contribution margin of the segment (last year): $65,000
• Current fixed costs associated with the segment: $70,000
• Percentage of fixed costs that will be avoided if discontinued: 50%

Calculations:

1. Contribution Margin Loss: If the segment is discontinued, the company will lose the contribution margin generated by it. This is a decrease in profit by $65,000.

2. Fixed Cost Savings: Since discontinuing the segment allows the company to avoid 50% of the fixed costs, the savings will be: $0.5 \times 70,000 = 35,000$

3. Net Effect on Profit: The net impact on profit can be calculated by subtracting the contribution margin loss from the fixed cost savings: $\text{Net Effect} = \text{Fixed Cost Savings} - \text{Contribution Margin Loss} = 35,000 - 65,000 = -30,000$

Conclusion:

The expected change in profit is a decrease of $30,000 if the segment is discontinued.

Would you like a detailed breakdown of each step, or do you have any further questions?

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Here are some additional related questions for practice:

1. If the fixed costs avoided were 60% instead of 50%, what would the impact on profit be?
2. How would the profit change if the contribution margin of the segment were $80,000?
3. What would happen if fixed costs were reduced by a higher percentage, such as 75%?
4. If another segment generated a contribution margin of $100,000 with the same fixed cost structure, would it also be a candidate for discontinuation?
5. How would the company’s decision change if the segment’s contribution margin increased by 10% next year?

Tip: When analyzing decisions to discontinue segments, consider both variable and fixed costs carefully to understand the net profit effect.