Question

A manufacturer is considering eliminating a segment because it shows the following $6,500 loss: All $21,600 of its variable costs are avoidable, and $39,700 of its fixed costs are avoidable.

Segment Income (Loss)
Sales $ 64,000
Variable costs 21,600
Contribution margin 43,200
Fixed costs 49,700
Income (loss) (6,500)

Compute the income increase or decrease from eliminating this segment

Answer 1

Eliminating the segment would result in an additional income decrease of $2,700 for the company, as the revenue lost exceeds the savings on variable and avoidable fixed costs.

Step-by-step explanation:

The student is asking for a computation of the income increase or decrease that would result from eliminating a business segment displaying a loss. The segment in question currently has $64,000 in sales, $21,600 in variable costs, and $49,700 in fixed costs, leading to a loss of $6,500. If the segment is eliminated, all $21,600 of the variable costs and $39,700 of the avoidable fixed costs will not be incurred anymore.

To calculate the income change, we should consider both the elimination of variable costs and the avoidable fixed costs:

• Lose sales revenue: -$64,000
• Less variable costs: +$21,600
• Less avoidable fixed costs: +$39,700

The calculation would be -$64,000 (lost sales) + $21,600 (saved variable costs) + $39,700 (saved fixed costs) = -$2,700. This means that by eliminating the segment, the company's income would decrease by an additional $2,700, as it would lose more revenue than the sum of the costs it saves.