Assume a retailing company has two departments—Department A and Department B. The company’s most recent contribution format income statement follows: Total Department A Department B Sales $ 800,000 $ 350,000 $ 450,000 Variable expenses 350,000 250,000 100,000 Contribution margin 450,000 100,000 350,000 Fixed expenses 400,000 140,000 260,000 Net operating income (loss) $ 50,000 $ (40,000) $ 90,000 The company says that $60,000 of the fixed expenses being charged to Department A are sunk costs or allocated costs that will continue if the segment is discontinued. However, if Department A is discontinued the sales in Department B will drop by 18%. What is the financial advantage (disadvantage) of discontinuing Department A?
Assume a retailing company has two departments—Department A and Department B. The company’s most recent contribution format income statement follows: Total Department A Department B Sales $ 800,000 $ 350,000 $ 450,000 Variable expenses 350,000 250,000 100,000 Contribution margin 450,000 100,000 350,000 Fixed expenses 400,000 140,000 260,000 Net operating income (loss) $ 50,000 $ (40,000) $ 90,000 The company says that $60,000 of the fixed expenses being charged to Department A are sunk costs or allocated costs that will continue if the segment is discontinued. However, if Department A is discontinued the sales in Department B will drop by 18%. What is the financial advantage (disadvantage) of discontinuing Department A?
Chapter4: Operating Activities: Sales And Cash Receipts
Section: Chapter Questions
Problem 4.8C
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Assume a retailing company has two departments—Department A and Department B. The company’s most recent contribution format income statement follows:
Total | Department A | Department B | |
---|---|---|---|
Sales | $ 800,000 | $ 350,000 | $ 450,000 |
Variable expenses | 350,000 | 250,000 | 100,000 |
Contribution margin | 450,000 | 100,000 | 350,000 |
Fixed expenses | 400,000 | 140,000 | 260,000 |
Net operating income (loss) | $ 50,000 | $ (40,000) | $ 90,000 |
The company says that $60,000 of the fixed expenses being charged to Department A are sunk costs or allocated costs that will continue if the segment is discontinued. However, if Department A is discontinued the sales in Department B will drop by 18%. What is the financial advantage (disadvantage) of discontinuing Department A?
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