North Division has the following information: $$\begin{array} { l r }
\text { Sales } & \$ 1,200,000 \
\text { Variable expenses } & 640,000 \
\text { Fixed expenses } & 620,000
\end{array}$$ If this division is eliminated, the fixed expenses will be allocated to the company's other divisions. What is the incremental effect on net income if the division is dropped?
A)$60,000 increase
B)$620,000 decrease
C)$560,000 decrease
D)$580,000 increase

Question

North Division has the following information: $$\begin{array} { l r } 
\text { Sales } & \$ 1,200,000 \
\text { Variable expenses } & 640,000 \
\text { Fixed expenses } & 620,000
\end{array}$$ If this division is eliminated, the fixed expenses will be allocated to the company's other divisions. What is the incremental effect on net income if the division is dropped?
A)$60,000 increase
B)$620,000 decrease
C)$560,000 decrease
D)$580,000 increase

Quizplus · Accepted Answer

The incremental effect on net income if the division is dropped is a $560,000 decrease. This is calculated by subtracting the variable expenses from sales to find the contribution margin ($1,200,000 - $640,000 = $560,000). Since the fixed expenses will be reallocated and not eliminated, the contribution margin represents the loss in net income.