Market Inc.has two divisions,Talbot and Heather.Following is the income statement for the past month: What would Market's profit margin be if the Talbot division was dropped and all fixed costs are unavoidable?

A)$500 loss
B)$79,000 loss
C)$33,500 profit
D)$213,000 profit

Question

Market Inc.has two divisions,Talbot and Heather.Following is the income statement for the past month: What would Market's profit margin be if the Talbot division was dropped and all fixed costs are unavoidable?

A)$500 loss 
B)$79,000 loss 
C)$33,500 profit 
D)$213,000 profit

Quizplus · Accepted Answer

The profit margin is calculated by dividing the net income by the total revenue. If the Talbot division is dropped, the new income statement will look like this:

Heather division revenue: $500,000
Heather division variable costs: $200,000
Heather division contribution margin: $300,000

Total fixed costs: $379,000 ($100,000 + $279,000)

Net income: $300,000 - $379,000 = -$79,000

Therefore, the profit margin would be:

-$79,000 / $500,000 = -0.158, or a 15.8% loss.

The best choice is B because it is the only one that reflects the negative profit margin after dropping the Talbot division.