Question

Thomas Company has the following data for one of their recliners. This information is for the deluxe recliner model: Sales $200,000 Variable Costs 90,000 Contribution Margin 110,000 Fixed Costs 150,000 Operating Income (loss) $(40,000) Assume that if the deluxe recliner model is dropped, there would be a savings of 30% of the current fixed costs

Answer 1

If the division is discontinued theincome of the firm will decrease by 80,000

It is a financial disadvantage to do it.

Step-by-step explanation:

The department data can be disclosure as follow:

contribution 110,000

tracable fixed cost (30,000) (20% ofthe fixed cost)

operating income 80,000

allocate fixed (120,000) (150,000 - 30,000)

Result (40,000)

If the segment is discontinued; the other department will absorp the 80,000 which are currently taking by the deluxe recliner. Thus, income will drop by 80,000 if discontinued.