Question

A study has been conducted to determine if one of the departments in carry corporation should be discontinued. the contribution margin in the department is $80,000 per year. fixed expenses charged to the department are $95,000 per year. it is estimated that $50,000 of these fixed expenses could be eliminated if the department is discontinued. these data indicate that if the department is discontinued, the yearly financial advantage (disadvantage) for the company would be:

multiple choice
a. $30,000
b. $15,000
c. $30,000
d. $15,000

Answer 1

Discontinuing the department would lead to a financial advantage for Carry Corporation, as it would save on some fixed costs, which outweigh the contribution margin of the department. That results in a financial advantage of $35,000 .

Step-by-step explanation:

The question revolves around determining the financial impact of discontinuing a department within Carry Corporation. Contribution margin and fixed expenses are key terms in this equation.

The department currently has a contribution margin of $80,000 per year and fixed expenses amounting to $95,000 per year.

If the department is discontinued, $50,000 out of the $95,000 in fixed expenses can be eliminated, which means the company would still bear $45,000 of the fixed costs.

Hence, by discontinuing the department, Carry Corporation avoids losing the $15,000 deficit ( $95,000 - $80,000 ), and in addition avoids $50,000 in fixed costs but maintains $45,000 fixed costs.

That results in a financial advantage of $35,000 ($50,000 - $15,000).