Question

a study has been conducted to determine if one of the departments in parry company should be discontinued. the contribution margin in the department is $70,000 per year. fixed expenses charged to the department are $63,000 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 were discontinued, the company's overall operating income per year would change by how much?

Answer 1

If the department were discontinued, Parry Company's overall operating income would increase by $57,000 per year, as the remaining fixed expenses after discontinuation would be lower than the contribution margin the department brings in.

Step-by-step explanation:

In the scenario described for Parry Company, the department under consideration has a contribution margin of $70,000. The fixed expenses amount to $63,000, out of which $50,000 can be eliminated if the department is shut down. To calculate the change to the company's overall operating income if the department is discontinued, we subtract the remaining fixed expenses from the contribution margin:

Contribution Margin: $70,000

Fixed Expenses Eliminated: $50,000

Remaining Fixed Expenses: $63,000 - $50,000 = $13,000

The change in operating income = $70,000 (contribution margin) - $13,000 (remaining fixed expenses) = $57,000

Therefore, discontinuing the department would increase the company's overall operating income by $57,000 per year.