Question

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $35,000 and $70,000 in annual fixed costs. Of the fixed costs, $25,000 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be: A. $10,000 B. $(10,000) C. $35,000 D. $(35,000)

Answer 1

Answer:

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $35,000 and $70,000 in annual fixed costs. Of the fixed costs, $25,000 cannot be avoided.

The annual financial advantage for Fabri Corporation of eliminating this department would be:

A. $10,000

Explanation:

Annual Contribution margin =                                         $35,000

Annual departmental fixed costs = $70,000

Annual unavoidable fixed costs = $25,000

Therefore, the avoidable fixed cost (70,000 -25,000) = 45,000

Loss incurred by not eliminating the department =      ($10,000)

b) Fabri Corporation will avoid incurring the loss amounting to $10,000 by eliminating the department.  This implies that it will have some financial advantage by stopping the erosion of its profit margin from other departments.