Question

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $24,000 and $76,000 in annual fixed costs. Of the fixed costs, $21,000 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be:

Answer 1

Answer:

Net Contribution of the Department  $

Contribution margin                           24,000

Less: Avoidable fixed cost                 55,000

Net contribution                                  (31,000)

The department should be eliminated. The financial advantage of eliminating the department is that it will increase the total profit of the whole company by $31,000

Explanation:

This question relates to deleting a product or segment. The net contribution will be computed by deducting the avoidable fixed cost from the contribution margin. The avoidable fixed cost is total fixed cot minus unavoidable fixed cost. Since the net contribution is negative, it implies that the department should be eliminated.