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A study has been conducted to determine if one of the departments in Parry Company should...

A study has been conducted to determine if one of the departments in Parry Company should be discontinued. The contribution margin in the department is $50,000 per year. Fixed expenses charged to the department are $65,000 per year. It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department were discontinued, the company's overall operating income per year would change by how much?

Multiple Choice

  • An increase of $10,000.

  • A decrease of $10,000.

  • An increase of $25,000.

  • A decrease of $25,000.

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Answer #1

Answer

  • Correct Answer = Option #2: A Decrease of $ 10,000
  • Calculation:
    Result of elimination include:
    >Decrease in contribution by $ 50000 (Net income decrease by $ 50000)
    >Decrease in fixed cost $ 40000 (net income increase by $ 40000)
    >Net Increase (decrease) in net income = 40000 – 50000 = ($10,000)
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