Question

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

Segment income (loss)
Sales $64,500
Variable costs 21,500
Contribution margin 43,000
Fixed costs 49,500
Income (loss) 6,500
(a) Compute the income increase or decrease from eliminating this segment. (b) Should the segment be eliminated? Complete this question by entering your answers in the tabs below. Compute the income increase or decrease from eliminating this segment.

Answer 1

The income increase from eliminating the segment is $67,500 and the segment should be eliminated.

Step-by-step explanation:

The income increase or decrease from eliminating this segment can be calculated by subtracting the fixed costs and variable costs from the segment income. In this case, the income increase from eliminating the segment would be $6,500 plus $21,500 (variable costs) plus $39,500 (fixed costs), which equals $67,500.

Based on the calculation, the segment should be eliminated because the income increase from eliminating it is positive. This means that the company's overall income would increase if the segment is eliminated.

Answer 2

To compute the income increase or decrease from eliminating the segment, subtract the avoidable fixed costs of $39,500 from the segment's loss of $6,500. The segment should be eliminated because it is generating a loss of $6,500.

Step-by-step explanation:

To compute the income increase or decrease from eliminating the segment, subtract the avoidable fixed costs of $39,500 from the segment's loss of $6,500. The income increase or decrease from eliminating this segment would be -$46,000.

The segment should be eliminated because it is generating a loss of $6,500. By eliminating the segment, the company would save $39,500 in avoidable fixed costs, resulting in a higher overall income of -$46,000.