Question

The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation: Contribution margin $ 200,000 Fixed expenses 500,000 Net operating loss $ (300,000 ) If the Children's Division is eliminated, $170,000 of the above fixed expenses could be avoided. The annual financial advantage (disadvantage) for the company of eliminating this division should be:

Answer 1

The annual financial disadvantage of eliminating the division is $30,000.

Step-by-step explanation:

contribution margin = revenue - variable costs = $200,000

fixed expenses = $500,000

net loss = $300,000.

If the division is eliminated, only $170,000 of the fixed expenses can be avoided, therefore the company's fixed expenses will remain at $330,000.

Therefore, eliminating the children's division will result in a $30,000 (= $330,000 - $300,000) decrease in net income.