Question

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $37,000 and $74,000 in annual fixed costs. Of the fixed costs, $18,500 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be:___________.

a. ($37,000)
b. $37000
c. ($18,500)
d. $18,500

Answer 1

Effect on income= $18,500 increase

Step-by-step explanation:

Giving the following information:

Contribution margin= $37,000

Fixed costs= $74,000

Unavoidable fixed costs= $18,500

We will consider only the avoidable fixed costs:

Avoidable fixed costs= 74,000 - 18,500= $55,500

Current loss= 37,000 - 55,500= -$18,500

Now, the effect on the income of eliminating the department:

Effect on income= current loss + contribution margin

Effect on income= -18,500 + 37,000

Effect on income= $18,500 increase