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:

Question

Chaim

Business

7 October, 03:34

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:

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Answers (1)

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Aditya Melton · 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.