Question

HP20 Corporation is considering permanently shutting down a department that has an annual contribution margin of $30,000 and $70,000 in annual fixed costs.
Of the fixed costs, $12,000 cannot be avoided.
What would be the annual financial advantage (disadvantage) for HP20 Corporation. if the company shuts down the department?

Answer 1

Answer: Financial advantage of $28,000

Explanation:

The segment margin is;

= Contribution margin - fixed costs + unavoidable fixed cost

= 30,000 - 70,000 + 12,000

= -$28,000

Eliminating the department would eliminate the negative segment margin of $28,000 which means that net income will increase by that much making it a financial advantage.