(Solved):What would be the effect on a company’s net income of discontinuing a department with a…

 

Question

What would be the effect on a company’s net income of discontinuing a department with a contribution margin of $16,000 and allocated overhead of $32,000 (of which $14,000 cannot be eliminated)?

 

EXPERT ANSWER

In discontinuing a department, the net effect to the company’s operating income is calculated as follows.

Net effect on operating income = Decrease in overhead (avoidable costs) – Decrease in contribution margin

Net effect on operating income = (32,000 – 14,000)

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