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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

Respuesta :

Answer:

(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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