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.
