Manor Company plans to discontinue a department that has a contribution margin of $25,000 and $50,000 in fixed costs. Of the fixed costs, $21,000 cannot be eliminated. The effect on the profit of Manor Company of discontinuing this department would be:
A)a decrease of $25,000.
B)a decrease of $4,000.
C)an increase of $4,000.
D)an increase of $25,000.

Question

Quizplus · Accepted Answer

Discontinuing the department will eliminate $50,000 in fixed costs, of which $21,000 cannot be eliminated. This will result in a decrease in fixed costs of $29,000 ($50,000 - $21,000). The contribution margin of the department is $25,000. Therefore, the effect on the profit of Manor Company of discontinuing this department would be an increase of $4,000 ($29,000 - $25,000).

Manor Company Plans to Discontinue a Department That Has a Contribution