Question

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $6,000. The division sales for the year were $1,042,000 and the variable costs were $863,000. The fixed costs of the division were $185,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

Answer 1

Answer:

$123,500

Explanation:

The impact on operating income for eliminating this business segment is shown below:

Sales                              $1,042,000

Less: Variable cost       -$863,000

Contribution margin      $179,000

Less: Fixed cost            - $55,500    ($185,000 × 30%)

Impact in Operating income  $123,500

By finding out the operating income we concluded that there is a decrease in operating income for $123,500