Logan Corporation is considering a eliminating a department that has incurred losses over the past several years.The department has a contribution margin of $32,000 per year.The fixed costs charged to the department total $37,000.$15,000 of the fixed costs is avoidable.If the department is eliminated, what would be the effect on the corporation's operating income?
A)$17,000 decrease
B)$37,000 decrease
C)$15,000 increase
D)$22,000 increase

Question

Quizplus · Accepted Answer

If the department is eliminated, the corporation can avoid $15,000 of fixed costs. Therefore, the total decrease in fixed costs would be $37,000 - $15,000 = $22,000. Since the department's contribution margin is only $32,000 per year, eliminating the department would result in a net decrease of $10,000 in operating income ($32,000 - $22,000 = $10,000). Therefore, the corporation's operating income would decrease by $10,000, which corresponds to answer choice A.

Logan Corporation Is Considering a Eliminating a Department That Has