Question

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $26,000 and $74,000 in annual fixed costs. Of the fixed costs, $18,000 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be:

Answer 1

Answer: There would be decrease in loss by $30,000

Explanation: As we know that :-

current income = contribution margin - fixed cost

.

Now, calculating current net income / loss :-

net income / loss = $26,000 - $74,000

= $48,000 loss

Now, after eliminating department :-

net income / loss = $18,000 loss

So the company will have an advantage by eliminating the department as it would result in decrease in loss by ( $48,000 loss - $18,000 loss ) $30,000.