The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation: If the Children's Division is eliminated, $170,000 of the above fixed expenses could be avoided. The annual financial advantage (disadvantage) for the company of eliminating this division should be:
A) ($300,000)
B) $30,000
C) ($30,000)
D) $300,000

Question

The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation:  If the Children's Division is eliminated, $170,000 of the above fixed expenses could be avoided. The annual financial advantage (disadvantage) for the company of eliminating this division should be:
A) ($300,000) 
B) $30,000 
C) ($30,000) 
D) $300,000

Quizplus · Accepted Answer

To calculate the annual financial advantage (disadvantage) of eliminating the Children's Division, we need to compare the projected operating results with and without the division.

Without the division, the company's fixed expenses would decrease by $170,000. However, we also need to consider the division's contribution to the company's profit.

Looking at the projected operating results, we see that the Children's Division is expected to generate $200,000 in operating income. Therefore, if the division is eliminated, the company will lose this income as well.

So, the annual financial advantage (disadvantage) of eliminating the division would be:
$200,000 operating income - $170,000 avoided fixed expenses = $30,000 disadvantage

Therefore, the best choice is C.

The Following Information Relates to Next Year's Projected Operating Results