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1 December, 09:04

Profits at CincySavers are declining. The sales consulting department reported a contribution margin of $80,000 and fixed costs of $160,000, $90,000 of the fixed costs cannot be avoided. Management is considering closing this department. What is the financial consequence of eliminating this department

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  1. 1 December, 09:07
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    It will be a financial disadvantage for 10,000

    the loss will be for 90,000

    which is an increase of 10,000 in the department losses.

    It is better to continue with the department.

    Explanation:

    contribution 80,000

    fixed cost (160,000)

    net loss (80,000)

    discontnued department

    contribution 0

    unavoidable fixed cost (90,000)

    net loss (90,000)

    the consequence of eliminating the department will be comparing both result

    discontinued result - current result

    (-90,000) - (-80,000) = - 10,000

    It will be a financial disadvantage for 10,000

    It is better for the company to keep the department active.
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