A study has been conducted to determine if one of the departments in Barry Corporation should be discontinued. The contribution margin in the department is $60,000 per year. Fixed expenses charged to the department are $75,000 per year. It is estimated that $34,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, the company's overall net operating income would:
A)decrease by $26,000 per year
B)increase by $26,000 per year
C)decrease by $15,000 per year
D)increase by $15,000 per year

Question

Quizplus · Accepted Answer

The contribution margin is the difference between the department's revenue and variable expenses. In this case, we know that the department's contribution margin is $60,000 per year.

However, the department also incurs fixed expenses of $75,000 per year. This means that if the department is continued, it is actually operating at a loss of $15,000 ($60,000 - $75,000).

If the department is discontinued, we know that $34,000 of the fixed expenses can be eliminated. This means that the company's overall net operating income would increase by $26,000 per year ($60,000 - $41,000).

Therefore, the correct answer is A) decrease by $26,000 per year.

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