Vanik Corporation currently has two divisions which had the following operating results for last year: Because the Rubber Division sustained a loss, the president of Vanik is considering the elimination of this division.All of the division's traceable fixed costs could be avoided if the division was dropped.None of the allocated common corporate fixed costs could be avoided.If the Rubber Division was dropped at the beginning of last year, the financial advantage (disadvantage)to the company for the year would have been:
A)($20,000)
B)$20,000
C)$25,000
D)($25,000)

Question

Vanik Corporation currently has two divisions which had the following operating results for last year:  Because the Rubber Division sustained a loss, the president of Vanik is considering the elimination of this division.All of the division's traceable fixed costs could be avoided if the division was dropped.None of the allocated common corporate fixed costs could be avoided.If the Rubber Division was dropped at the beginning of last year, the financial advantage (disadvantage)to the company for the year would have been:
A)($20,000) 
B)$20,000 
C)$25,000 
D)($25,000)

Quizplus · Accepted Answer

If the Rubber Division had been dropped at the beginning of last year, the company would have saved $20,000 in fixed costs (as mentioned in the question stem). However, it would have also lost out on the contribution margin of $75,000 from the division, which is the excess of sales revenue over variable costs. Therefore, the net financial advantage (disadvantage) to the company for the year would be:

Net advantage (disadvantage) = Contribution margin - Avoidable fixed costs
= $75,000 - $20,000
= $55,000

Since the net advantage is positive, dropping the Rubber Division would be a disadvantage to the company. Therefore, the correct answer is A) ($20,000) which represents the avoidable fixed costs if the Rubber Division was dropped. If the Rubber Division had been eliminated, Vanik would have lost its segment margin of $20,000.Consequently, overall net operating income would have been $20,000 lower.

Vanik Corporation Currently Has Two Divisions Which Had the Following