Assume a retailing company has two departments Department A and Department B. The company's most recent contribution format income statement follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) Total Department Department A B $ $ 800,000 350,000 320,000 120,000 200,000 480,000 230,000 250,000 400,000 140,000 $ 80,000 $ 450,000 $ 90,000 260,000 $ (10,000) The company says that $140,000 of the fixed expenses being charged to Department B are sunk costs or allocated costs that will continue if the segment is discontinued. However, if Department B is discontinued the sales in Department A will drop by 8%. What is the financial advantage (disadvantage) of discontinuing Department B?
Assume a retailing company has two departments Department A and Department B. The company's most recent contribution format income statement follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) Total Department Department A B $ $ 800,000 350,000 320,000 120,000 200,000 480,000 230,000 250,000 400,000 140,000 $ 80,000 $ 450,000 $ 90,000 260,000 $ (10,000) The company says that $140,000 of the fixed expenses being charged to Department B are sunk costs or allocated costs that will continue if the segment is discontinued. However, if Department B is discontinued the sales in Department A will drop by 8%. What is the financial advantage (disadvantage) of discontinuing Department B?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Assume a retailing company has two
departments Department A and Department
B. The company's most recent contribution
format income statement follows:
Sales
Variable
expenses
Contribution
margin
Fixed
expenses
Net
operating
income
(loss)
Total
Department Department
A
B
$
$
800,000 350,000
320,000 120,000 200,000
480,000 230,000
400,000 140,000
$
80,000
$
450,000
$ 90,000
250,000
260,000
$
(10,000)
The company says that $140,000 of the fixed
expenses being charged to Department B are
sunk costs or allocated costs that will continue if
the segment is discontinued. However, if
Department B is discontinued the sales in
Department A will drop by 8%. What is the
financial advantage (disadvantage) of
discontinuing Department B?
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