Albert Company plans to discontinue a division that generates a total contribution margin of $20,000 per year. Fixed overhead associated with this division is $50,000, of which $5,000 cannot be eliminated.
If the division is discontinued, how would Albert's operating income is affected?
A) Have no effect on operating income
B) Decrease operating income by $15,000
C) Increase operating income by $25,000
D) Increase operating income by $30,000

Question

Quizplus · Accepted Answer

If the division is discontinued, Albert will lose the $20,000 contribution margin but save $45,000 of the fixed overhead ($50,000 total fixed overhead - $5,000 unavoidable fixed overhead). Thus, operating income will increase by $25,000 ($45,000 savings - $20,000 lost contribution margin).

Albert Company Plans to Discontinue a Division That Generates a Total