Question

Fabio Corporation is considering eliminating a department that has a contribution margin of $39,000 and $78,000 in fixed costs. Of the fixed costs, $19,500 cannot be avoided. The effect of eliminating this department on Fabio's overall net operating income would be:

Answer 1

a decrease of $39,000.

an increase of $39,000.

a decrease of $19,500.

an increase of $19,500.

The correct option is the last one,an increase of $19,500

Step-by-step explanation:

The impact on net operating income when the department is eliminated in Fabio Corporation is the company would lose the contribution margin of $39,000 and avoidable fixed cost,hence overall effect of the elimination is the difference between the contribution margin lost and the avoidable fixed costs which is computed thus:

Lost contribution margin $39000

Unavoidable fixed cost $19,500

Total fixed costs

avoidable fixed cost=$78,000-$19,500=$58,500

decrease in overall net operating income=$58,500-$39,000=$19,500