Question

A study has been conducted to determine if one of the departments in Carry Corporation should be discontinued. The contribution margin in the department is $80,000 per year. Fixed expenses charged to the department are $95,000 per year. It is estimated that $50,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, the yearly financial advantage (disadvantage) for the company would be:

Answer 1

Answer:

It is better to continue

Explanation:

If discontinued, it will generate no contribution.

If discontinued, 50,000 fixed cost are eliminated, therefore 45,000 are unavoidable.

The differential income is negative 30,000

It generate more losses if discontinued.

It is better to continue

                         Continue       Discountied  Diffence

Contribution          80,000                        0        -80,000

Fixed Cost         -95000                 -45000         50,000

Loss                  -15,000                -45,000           -30,000