Question

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $3,000. The division sales for the year were $1,047,000 and the variable costs were $860,000. The fixed costs of the division were $190,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

Answer 1

$130,000 decrease

Step-by-step explanation:

Multiple Choice $57,000 decrease $130,000 decrease $54,000 decrease $187,000 increase $187,000 decrease

Calculation of Financial advantage / Disadvantage

Decrease in contribution margin $187,000

(1,047,000-860,000)

Decrease in fixed expenses $57,000

(190000*30%)

Decrease in Net Operating Income $130,000 (Financial disadvantage)