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Wasilko Corporation has two departments, Kids and Adults. The companys most recent monthly contribution format income statement follows: Department Total Kids Adults Sales $4,200,000 $3,000,000

Wasilko Corporation has two departments, Kids and Adults. The companys 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 $100,000 of the fixed expenses being charged to the Adults Department are sunk costs or allocated costs that will continue even if the Adults Department is dropped. In addition, the elimination of the Adults Department will result in a 20% 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 $200,000

  • Increase by $220,000

  • Decrease by $220,000

  • Decrease by $180,000

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