Question

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $3,000. The division sales for the year were $1,050,000 and the variable costs were $860,000. The fixed costs of the division were $193,000. 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:________.
a) $57,900 decrease
b) $132,100 decrease
c) $54,900 decrease
d) $190,000 increase
e) $190,000 decrease

Answer 1

Answer:

b) $132,100 decrease

Explanation:

The impact on operating income is presented below:

Sales for the year   $1,050,000

Less: Variable cost  -$860,000

Contribution margin $190,000

Less: fixed cost ($193,000 × 30%) -$57,900

Net operating income $132,100  

We simply applied the above equation to find out the net operating income by considering the 30% of fixed cost elimination

So it would show the  decrement of $132,100