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11 April, 07:45

The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation:

Contribution margin $ 200,000

Fixed expenses 500,000

Net operating loss $ (300,000)

If the Children's Division is eliminated, $170,000 of the above fixed expenses could be avoided. The annual financial advantage (disadvantage) for the company of eliminating this division should be:

(A) ($300,000)

(B) $30,000

(C) ($30,000)

(D) $300,000

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Answers (1)
  1. 11 April, 08:14
    0
    (C) ($30,000)

    Explanation:

    As provided the details,

    Current level contribution margin = $200,000

    And the Fixed expenses = $500,000

    Thus, net operating loss = ($300,000)

    Now if the operations of Children Division is not conducted, then avoidable fixed expense = $170,000

    Thus, non avoidable fixed expenses = $$500,000 - $170,000 = $330,000

    Since no operations will be conducted there will be no contribution, accordingly entire fixed cost unavoidable will be net operating loss.

    Thus, from earlier loss of $300,000 the loss will increase by $30,000 making it $330,000

    Therefore, correct option is

    (C) ($30,000)
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