Question

Valber Company is considering eliminating its phone division. The company allocates fixed costs based on sales. If the phone division is dropped, $150,000 of the fixed costs allocated to that division could be eliminated. The impact on Valber’s operating income from eliminating the phone division would be:

	Desktops				Laptops				Tablets				Phones
Sales	$	356,000			$	871,500			$	694,000			$	975,000
Variable costs		201,000				635,000				528,000				795,000
Contribution margin		155,000				236,500				166,000				180,000
Fixed costs		71,200				174,300				138,800				195,000
Net income (loss)		83,800				62,200				27,200				(15,000	)

Answer 1

There will be decrease in total income by $30000 i.e. $45000 - $15000 = $30000

Since by eliminating phone line, $45000 ($195000 - $150000) fixed expenses will still be incurred