Question

Fabio corporation is considering eliminating a department that has a contribution margin of $26,000 and $74,000 in fixed costs. of the fixed costs, $18,000 cannot be avoided. the effect of eliminating this department on fabio's overall net operating income would be:

Answer 1

Fabio's overall net operating income would increase by $30,000 if Fabio corporation eliminates the department. This change can be found by determining the difference between the contribution margin and the avoidable fixed cost of the eliminated department. The department has $56,000 (74,000-18,000) of avoidable fixed cost and $26,000 of contribution margin. The difference between them is $30,000.