Question

Sales: $700,000

Variable expenses: $300,000
Fixed expenses: $550,000

What will be the incremental effect on net income if this segment is eliminated assuming the fixed expenses will be allocated to the remaining profitable segments?

Answer 1

The incremental effect on net income would be -$1,056,250 if this segment is eliminated and fixed expenses are allocated to the remaining profitable segments.

Step-by-step explanation:

To determine the incremental effect on net income if this segment is eliminated, we need to calculate the fixed expenses allocated to the remaining profitable segments. Given that the fixed expenses are $550,000 and the total contribution margin is $400,000 (sales minus variable expenses), we can calculate the ratio of fixed expenses to the contribution margin: $550,000 / $400,000 = 1.375.

Now, we can calculate the incremental effect on net income:

1. Subtracting the fixed expenses allocated to the eliminated segment: $550,000 x 1.375 = $756,250
2. Subtracting the variable expenses of the eliminated segment: $300,000
3. Subtracting the total incremental cost: $756,250 + $300,000 = $1,056,250

Therefore, the incremental effect on net income if this segment is eliminated would be -$1,056,250.