Question

Roger Rabbit Enterprises is considering whether to discontinue a division that generates a total contribution margin of $66,000 per year Fixed manufacturing overhead allocated to this division is $50,000, of which 19,000 is unavoidable. If Roger Rabbit Enterprises were to eliminate this division, the effect on the company's operating income would be a (n) O A. decrease in total operating income of $35,000 O B. increase in total operating income of $47,000. O C. increase in total operating income of $35,000. O D. decrease in total operating income of $47,000

Answer 1

A. decrease in total operating income of $35,000

Step-by-step explanation:

As provided the contribution generated today = $66,000

Now, when the firm chooses to discontinue operations then, this will be not earned.

Further the operating income earlier from this division shall be:

Contribution - Fixed cost = $66,000 - $50,000 = $16,000

Now, this shall not be earned, thus company will lose $16,000

Thus attributable fixed cost shall be $50,000 - $19,000 = $31,000

Therefore, contribution lost - Fixed cost unavoidable = $66,000 - $31,000 = $35,000 shall be the operating loss now.

Thus, with $35,000 the operating profit will decrease.