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 $ 800,000 320,000 480,000 400,000 $ 80,000 Department A Department B $ 350,000 $ 450,000 120,000 200,000 250,000 260,000 $ 90,000 $ (10,000) 230,000 140,000 The company says that $130,000 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 10%. What is the financial advantage (disadvantage) of discontinuing Department B?

FINANCIAL ACCOUNTING
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ISBN:9781259964947
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Chapter1: Financial Statements And Business Decisions
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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:
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income (loss)
Total
$ 800,000
320,000
480,000
400,000
$ 80,000
Department A Department B
$ 350,000 $ 450,000
120,000
230,000
140,000
$ 90,000
200,000
250,000
260,000
$ (10,000)
The company says that $130,000 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 10%. What is the financial advantage (disadvantage) of discontinuing Department B?
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 $ 800,000 320,000 480,000 400,000 $ 80,000 Department A Department B $ 350,000 $ 450,000 120,000 230,000 140,000 $ 90,000 200,000 250,000 260,000 $ (10,000) The company says that $130,000 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 10%. What is the financial advantage (disadvantage) of discontinuing Department B?
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