Assume a retailing company has two departmentsDepartment A and Department B. The companys most recent contribution format income statement follows: Total Department A Department B
Assume a retailing company has two departmentsDepartment A and Department B. The companys most recent contribution format income statement follows:
| Total | Department A | Department B | |
|---|---|---|---|
| Sales | $ 800,000 | $ 350,000 | $ 450,000 |
| Variable expenses | 350,000 | 250,000 | 100,000 |
| Contribution margin | 450,000 | 100,000 | 350,000 |
| Fixed expenses | 400,000 | 140,000 | 260,000 |
| Net operating income (loss) | $ 50,000 | $ (40,000) | $ 90,000 |
The company says that $60,000 of the fixed expenses being charged to Department A are sunk costs or allocated costs that will continue if the segment is discontinued. However, if Department A is discontinued the sales in Department B will drop by 18%. What is the financial advantage (disadvantage) of discontinuing Department A?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Authors: Trevor Hopper, Robert W. Scapens, Deryl Northcott
3rd Edition
0273702572, 978-0273702573
