A study has been conducted to determine if one of the departments in Parry Company should be discontinued. The contribution margin in the department is $40,000 per year. Fixed expenses charged to the department are $65,000 per year. It is estimated that $30,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, the company's overall net operating income would:
A)decrease by $25,000 per year.
B)decrease by $15,000 per year.
C)increase by $15,000 per year.
D)increase by $25,000 per year.

Question

Quizplus · Accepted Answer

If the department is discontinued, the company would lose the $40,000 contribution margin but save $30,000 in fixed expenses. This results in a net decrease of $10,000 in expenses, leading to a decrease in net operating income by $25,000 ($40,000 - $15,000).

A Study Has Been Conducted to Determine If One of the Departments