ICANManagement InformationAbsorption and Marginal Costing2020

Lagos Breweries Plc operates three product lines: Alpha, Beta, and Gamma with contribution margins of ₦200, ₦350, and ₦150 per unit respectively. Fixed costs directly attributable to each line are ₦1,200,000, ₦2,100,000, and ₦900,000 respectively. Common fixed costs are ₦3,500,000. Gamma currently generates a segment contribution (after attributable fixed costs) of ₦600,000. Which statement best reflects the marginal costing decision regarding Gamma?

AGamma should be discontinued because it generates a loss after absorbing common fixed costs
BGamma should be retained because it makes a positive contribution towards common fixed costsCORRECT
CGamma should be discontinued because its contribution margin per unit is the lowest
DGamma should be retained only if common fixed costs can be reduced proportionately
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Why the answer is B, and why the others tempt you.
Under marginal costing principles, a product should be retained as long as it generates a positive contribution after deducting its own attributable (avoidable) fixed costs. Gamma earns a positive segment contribution of ₦600,000, meaning it contributes to covering common fixed costs. Discontinuing Gamma would reduce total company profit by ₦600,000, as common fixed costs would still be incurred and shared among remaining products.
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