DROP OR CONTINUE A DEPARTMENT:

The income statement of Baxer Corporation's Department 4 for October 20xx is given below:

Baxer Corporation

Income Statement - Department 4

For the Month ended, October 31, 20xx

Sales$2,400,000

Less: Variable costs and expenses1,800,000

Contribution Margin600,000

Less: Fixed costs and expenses 800,000

Net income$(200,000)

Sixty percent of the total fixed costs and expenses are allocated from the head office. The company's president is contemplating to drop Department 4 on account of its unfavorable performance. The discontinuance of Department 4 would not affect sales of other departments.

Required:

a.Compute the segment margin of Department 4 in October 20xx

b.Would you recommend Department 4 to drop or continue operating?