Clay Inc.has two divisions,Myrtle and Laurel.Following is the income statement for the previous year: What would Clay's profit margin be if the Laurel division was dropped and all fixed costs are unavoidable?
A)$99,625 profit
B)$91,000 profit
C)$384,000 profit
D)$71,000 loss

Question

Clay Inc.has two divisions,Myrtle and Laurel.Following is the income statement for the previous year:  What would Clay's profit margin be if the Laurel division was dropped and all fixed costs are unavoidable?
A)$99,625 profit 
B)$91,000 profit 
C)$384,000 profit 
D)$71,000 loss

Quizplus · Accepted Answer

If the Laurel division is dropped and all fixed costs are unavoidable, then the total fixed costs of $170,000 will be allocated only to the Myrtle division. This means that the Myrtle division will incur an additional fixed cost of $85,000 ($170,000/2) and its profit will decrease from $84,000 to -$1,000. Therefore, the overall profit will be a loss of $71,000 ($84,000 profit from Myrtle division - $170,000 fixed cost + $15,000 profit from Laurel division).

Clay IncHas Two Divisions,Myrtle and Laurel