A product line reports a loss from operations, yet its revenue still exceeds all of its own variable costs. Why should it be kept?

1. The reported loss is struck after charging the line with a share of fixed costs. 2. Fixed costs such as depreciation, property taxes and insurance are not reduced by dropping the line. 3. Stripping them out, revenue of $700,000 less variable costs of $360,000 and $300,000 leaves $40,000. 4. That $40,000 is a genuine contribution towards fixed costs that already exist. 5. Discontinuing brings in no revenue and no variable cost, so the $40,000 contribution is simply lost. 6. Dropping the line therefore makes the company worse off by $40,000, not better off. 7. Variable costs are precisely the ones that would stop, which is why the last option inverts the rule. _Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.3 Continue With or Discontinue a Product_