A company has two departments, Kids and Adults. The company's most recent monthly contribution format income statement follows:

Department

Total Kids Adults

Sales $4,200,000 $3,000,000 $1,200,000

Variable expenses 2,000,000 1,500,000 500,000

Contribution Margin 2,200,000 1,500,000 700,000

Fixed Expenses 2,200,000 1,300,000 900,000

Net operating income (loss) 0 200,000 (200,000)

A study indicates that $50,000of the fixed expenses being charged to the Adults Departmentare sunk costs or allocated costs that will continue even if the Adults Department is dropped. In addition, the elimination of the AdultsDepartment will result in a20% decrease in the sales of the Kids Department. If the Adults Department is dropped, what will be the effect on the net operating income of the company as a whole?

Multiple Choice

• Decrease by $150,000
• Increase by $170,000
• Decrease by $170,000
• Decrease by $130,000