Fabri Corporation is considering eliminating a department that has an annual contribution margin of $35,000 and $70,000 in annual fixed costs. Of the fixed costs, $25,000 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be:
A) $10,000
B) ($10,000)
C) $35,000
D) ($35,000)

Question

Quizplus · Accepted Answer

If the department is eliminated, the company will save $70,000 in fixed costs, but it will also lose $35,000 in contribution margin. The net financial advantage (disadvantage) is therefore $70,000 - $35,000 = $35,000. However, $25,000 of the fixed costs cannot be avoided, so the actual financial advantage (disadvantage) is $35,000 - $25,000 = $10,000.

Fabri Corporation Is Considering Eliminating a Department That Has an Annual