Roger Rabbit Enterprises is considering whether to discontinue a division that generates a total contribution margin of $66,000 per year. Fixed manufacturing overhead allocated to this division is $50,000, of which 19,000 is unavoidable. If Roger Rabbit Enterprises were to eliminate this division, the effect on the company's operating income would be a (n)
A)increase in total operating income of $35,000.
B)decrease in total operating income of $35,000.
C)increase in total operating income of $47,000.
D)decrease in total operating income of $47,000.

Question

Quizplus · Accepted Answer

If the division is discontinued, the fixed manufacturing overhead allocated to the division will no longer be incurred by the company, leading to a decrease in fixed costs of $50,000. However, the unavoidable portion of fixed manufacturing overhead will still have to be incurred by the company, leading to a decrease in fixed costs of $19,000. Therefore, the net decrease in fixed costs will be $31,000. 
Since the division generates a total contribution margin of $66,000 per year, discontinuing the division will lead to a decrease in the company's total contribution margin of $66,000 per year. 
Thus, the effect on the company's operating income will be a decrease of $35,000 ($66,000 - $31,000).

Roger Rabbit Enterprises Is Considering Whether to Discontinue a Division