A segment has the following data: $$\begin{array} { l r }
\text { Sales } & \$ 700,000 \
\text { Variable expenses } & 300,000 \
\text { Fixed expenses } & 550,000
\end{array}$$ What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?
A) $400,000 increase
B) $400,000 decrease
C) $5,000 decrease
D) Cannot be determined from the data provided.

Question

A segment has the following data: $$\begin{array} { l r } 
\text { Sales } & \$ 700,000 \
\text { Variable expenses } & 300,000 \
\text { Fixed expenses } & 550,000
\end{array}$$ What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?
A) $400,000 increase
B) $400,000 decrease
C) $5,000 decrease
D) Cannot be determined from the data provided.

Quizplus · Accepted Answer

If the segment is eliminated, the company will lose the contribution margin of $400,000 (Sales of $700,000 minus Variable expenses of $300,000), leading to a decrease in net income by that amount. Fixed expenses will still be incurred as they are allocated to other segments.