A study has been conducted to determine if one of the departments in Carry Corporation should be discontinued. The contribution margin in the department is $80,000 per year. Fixed expenses charged to the department are $95,000 per year. It is estimated that $50,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, the yearly financial advantage (disadvantage) for the company would be:
A) ($15,000)
B) $15,000
C) ($30,000)
D) $30,000

Question

Quizplus · Accepted Answer

The contribution margin is the revenue generated by the department after covering variable expenses such as direct labor, materials, and overhead. In this case, the contribution margin is $80,000 per year.

Fixed expenses are expenses that do not vary with changes in sales or production volume. They include items such as rent, salaries, and insurance. The fixed expenses charged to the department are $95,000 per year.

If the department is discontinued, it is estimated that $50,000 of these fixed expenses could be eliminated.

To determine the yearly financial advantage or disadvantage of discontinuing the department, we need to calculate the net income of the department.

Net Income = Contribution Margin - Fixed Expenses

Net Income = $80,000 - $95,000 = ($15,000)

This means that the department is currently operating at a loss, as its contribution margin is less than its fixed expenses.

If the department is discontinued and $50,000 of fixed expenses are eliminated, the net income would be:

Net Income = $80,000 - $45,000 = $35,000

This means that discontinuing the department would result in a yearly financial advantage of $35,000 for the company.

Therefore, the answer is C, as discontinuing the department would result in a yearly financial advantage of $30,000 ($35,000 - $5,000, the difference between the current fixed expenses and the fixed expenses that could be eliminated).

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