Halliburton Division has the following data: $$\begin{array} { l r }
\text { Sales } & \$ 500,000 \
\text { Variable expenses } & 240,000 \
\text { Fixed expenses } & 280,000
\end{array}$$ The fixed costs are not avoidable and must be allocated to profitable divisions if the segment is eliminated.What will be the incremental effect on net income if Halliburton Division is eliminated?
A)$60,000 increase
B)$260,000 decrease
C)$280,000 decrease
D)Cannot be determined from the data provided.

Question

Halliburton Division has the following data: $$\begin{array} { l r } 
\text { Sales } & \$ 500,000 \
\text { Variable expenses } & 240,000 \
\text { Fixed expenses } & 280,000
\end{array}$$ The fixed costs are not avoidable and must be allocated to profitable divisions if the segment is eliminated.What will be the incremental effect on net income if Halliburton Division is eliminated?
A)$60,000 increase
B)$260,000 decrease
C)$280,000 decrease
D)Cannot be determined from the data provided.

Quizplus · Accepted Answer

If the division is eliminated, the company will lose the contribution margin of $260,000 (Sales of $500,000 - Variable expenses of $240,000), while fixed expenses of $280,000 will still remain. Thus, eliminating the division will decrease net income by $260,000.