Question

Milli Company plans to discontinue a division that generates a total contribution margin of $20,000 per year. Fixed overhead associated with this division is $50,000, of which $5,000 cannot be eliminated. The effect of this discontinuance on Milli's operating income would be an increase of:

Answer 1

Increase in operating income $25,000

Step-by-step explanation:

The effect of the discontinue on operating income is shown below:

Fixed overhead cost ($50,000 - $5,000) $45,000

Less: contribution margin per year -$20,000

Increase in operating income $25,000

We simply deduct the contribution margin from the fixed overhead cost so that the increase in operating income could come