Question

The ATK Division of Picatinny Arsenal has an annual contribution margin of $34,000along with $68,000 in annual fixed costs. Of the fixed costs of the ATK Division, $17,000 cannot be avoided. What would be the annual financial advantage (disadvantage) for Picatinny if the ATK division was closed down? Multiple Choice ($34,000) $34,000 ($17,000)

Answer 1

Solution: The answer is $17,000.

Explanation: Current net operating income = Contribution margin - Fixed cost

= $34,000 - $68,000 = $(34,000)

Unavoidable fixed costs after elimination = $(17,000)

Hence financial advantage would be = Unavoidable fixed costs after elimination less current net operating income

= $(17,000) - $(34,000)

= $(17,000) + $34,000 = $17,000

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