Question

Vegas Company is considering eliminating an unprofitable segment. The segment’s fixed costs are avoidable and are less than its contribution margin. Which of the following is a true consequence of eliminating this unprofitable segment?A.Overall net income will decrease.B.Overall fixed costs will increase.C.Overall contribution margin will increase.D.Overall variable costs will increase.

Answer 1

Answer:

A. Overall net income will decrease.

Explanation:

When the contribution margin of an unprofitable segment is less than the fixed costs, the net income of the company will increase if it eliminates that unprofitable segment.

However, it is not advisable to eliminate an unprofitable segment if its contribution margin is greater than the fixed costs, because it will be contributing to the recovery of the fixed costs it is not eliminated. But if it is eliminated, the overall net profit of the company will decrease due to the loss of contribution to the recovery of the fixed costs from the eliminated segment.

Therefore, the true consequence of eliminating the unprofitable segment by Vegas Company is that its overall net income will decrease.

Answer 2

Answer:

Option A,overall net income will decrease

Explanation:

The rule is that an unprofitable segment should be eliminated if its contribution is negative or zero.

In other words, a good justification for closing up an unprofitable segment of a business is when its contribution(sales-variable costs) is equal to or less than the fixed costs

If Vegas Company closes the unprofitable segment the overall net income will decrease because the segment's contributes to recovery of fixed costs since its contribution margin is more than its fixed costs,hence closing it brings about increased costs and reduced net income