Question

Ben Blum recently graduated from Moonshadow University's accounting program. He has been hired as an analyst by Primrose Tire Company and one of his first assigned tasks was to evaluate the North East division of Primrose. This division has been heavily focused on producing a special snow and mud tire. Sales of the special tire have been disappointing and management is now evaluating whether to eliminate the North East division. Ben performed the following analysis and is preparing to address the Board of Directors of Primrose with his recommendation that the North East division should be eliminated, resulting in an increase to total company profit of $49,000. Sales Revenue Cost of goods sold Gross profit Operating expenses Net operating income (loss) All Other Divisions $3,328,400 1,957,040 $1,371,360 1,955,880 $ 315,480 North East $200,000 153,000 $ 47,000 9 6,000 $(49,000) Total $3,528,400 2,110,040 $1,418,360 $ 266,480 The North East division's cost of goods sold includes $33,000 in fixed costs and operating expenses include $46,000 in fixed costs. None of the fixed costs will be eliminated if the North East division is discontinued. Required: Compute the contribution margin lost by the division. (Loss amounts should be indicated by a minus sign.)

Answer 1

Elimination of north east
Lost sales revenue	(200000)
Less: avoidable variable expenses (120000+50000)	170000
Lost contribution margin	$(30000)

Variable cost of goods sold = 153000-33000 = 120000

Variable operating costs = 96000-46000 = 50000