Question

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

Answer 1

Answer:

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.