Question

Contribution Margin of Walls Corporation, Consumer division is Rs. 1900,000 and the fixed expenses is Rs. 2,200,000 per year. Company is considering to eliminate this consumer division. If the Consumer Division is eliminated, $1,700,000 of the above fixed expenses could be avoided. What will be the effect on Wall's profit next year if Consumer Division is eliminated?

Answer 1

Answer:

Walls Corporation

Consumer division

The effect on Wall's profit next year if Consumer Division is eliminated is

a reduction of the profit by $200,000.

Explanation:

a) Data and Calculations:

Contribution Margin =         $1,900,000

Fixed Expenses                    2,200,000

Avoidable fixed expenses  $1,700,000

Unavoidable fixed expense $500,000 ($2,200,000 - $1,700,000)

Reduction in profit:

Contribution Margin =         $1,900,000

Avoidable fixed expenses  $1,700,000

Reduction in profit =             $200,000

b) Unavoidable fixed expenses are the costs that Walls must incur if it wants to stay in business.  They cannot be eliminated even if Walls Corporation eliminates the Consumer division.  Rent is an example of the costs that Walls cannot avoid if it discontinues the operations of its Consumer division.  Most unavoidable fixed costs are not traceable to the division.