Question

Trey co. plans to discontinue a department that has a $42,200 contribution margin and $95,000 of fixed costs. of these fixed costs, $47,000 cannot be avoided. what would be the effect of discontinuing the department on trey's overall operating income?

a. an increase of $5,800.
b. a decrease of $6,000.
c. an increase of $48,000.
d. a decrease of $48,000.

Answer 1

Discontinuing the department will decrease Trey Co.'s overall operating income by $5,800 due to losing the $42,200 contribution margin while saving only $48,000 in avoidable fixed costs.

Step-by-step explanation:

The effect of discontinuing the department on Trey Co.'s overall operating income can be calculated by considering the contribution margin lost against the fixed costs saved. Since the department has a contribution margin of $42,200 (which would be lost if the department is discontinued) and fixed costs of $95,000 (of which $47,000 cannot be avoided even if discontinued), we can calculate the net effect on the operating income.

If Trey Co. discontinues the department, it will no longer earn the contribution margin of $42,200, but it will save $48,000 in avoidable fixed costs ($95,000 total fixed costs - $47,000 unavoidable fixed costs).

The net effect is the saved costs minus the lost contribution margin: $48,000 - $42,200 = $5,800.

Therefore, the discontinuation would result in a decrease in overall operating income by $5,800, which makes option A.an increase of $5,800 incorrect and option B. a decrease of $6,000 (rounded from $5,800) correct.