Question

McCarthy Industries has two sales territories-East and West. Financial information for the two territories is presented below: East West Sales $980,000 $750,000 Direct costs: Variable (343,000) (225,000) Fixed (450,000) (325,000) Allocated common costs (275,000) (175,000) Net income (loss) $(88,000) $25,000 Because the company is in a start-up stage, corporate management feels that the East sales territory is creating too much of a cash drain on the company and it should be eliminated. If the East territory is discontinued, one sales manager (whose salary is $40,000 per year) will be relocated to the West territory. By how much would McCarthy's income change if the East territory is eliminated

Answer 1

Answer:

Decrease in income by $227,000

Explanation:

The computation of the amount of the change in the income in the case when the east territory is eliminated is shown below;

= -Sales + Direct cost + fixed cost - salary per year

= -$980,000 + $343,000 + ($450,000 - $40,000)

= -$980,000 + $343,000 + $410,000

= -$227,000

Hence, the amount of the change in the income in the case when the east territory is eliminated is -$227,000

Decrease in income by $227,000