Question

Because the Rubber Division sustained a loss, Vanikoro is considering the elimination of this division. All of the division's traceable fixed costs could be avoided if the division was dropped. None of the allocated common fixed costs could be avoided. If the Rubber Division was dropped at the beginning of last year, how much higher or lower would Vanikoro's total net operating income have been for the year?

Answer 1

Answer:

Decrease in Net operating income ($30,000)

Explanation:

The computation of the change in net operating income is shown below:

Particulars                        Rubber Division

Lost of Contribution margin  ($100,000)

Savings from avoidable fixed costs :  

Traceable fixed costs $70,000

Decrease in Net operating income ($30,000)

We simply deduct the traceable fixed cost from the loss of contribution margin so that the change in net operating income could come