Brandy Company is deciding whether or not to discontinue one of its divisions.The division's contribution margin is $27,000 per year.The fixed costs charged to the division total $32,000, but $15,000 would be eliminated if the division is discontinued.If the division is eliminated, the overall operating income will
A)decrease by $9,000.
B)decrease by $12,000.
C)decrease by $15,000.
D)increase by $27,000.

Question

Quizplus · Accepted Answer

To determine the impact of discontinuing the division on overall operating income, we need to calculate the current operating income of the division and the impact of discontinuing it.

Current operating income of the division: 
Contribution margin - Fixed costs = $27,000 - $32,000 = ($5,000)

This means that the division is currently operating at a loss of $5,000.

Impact of discontinuing the division: 
Fixed costs eliminated - $15,000 
Contribution margin lost - $27,000

Overall impact on operating income = -$15,000 - (-$27,000) = -$12,000

Therefore, if the division is discontinued, the overall operating income will decrease by $12,000.

Brandy Company Is Deciding Whether or Not to Discontinue One