Fabio Corporation is considering eliminating a department that has a contribution margin of $30,000 and $60,000 in fixed costs. Of the fixed costs, $15,000 cannot be avoided. The effect of eliminating this department on Fabio's overall net operating income would be:
A)a decrease of $30,000.
B)an increase of $30,000.
C)a decrease of $15,000.
D)an increase of $15,000.

Question

Quizplus · Accepted Answer

The contribution margin is the amount by which the department contributes to Fabio's overall net operating income, which is $30,000. However, there are fixed costs of $60,000, out of which $15,000 are unavoidable. Therefore, if the department is eliminated, Fabio would save $60,000 - $15,000 = $45,000 in fixed costs. This would result in a decrease in net operating income of $30,000 (contribution margin) - $45,000 (fixed cost savings) = -$15,000. Thus, eliminating the department would cause a decrease in Fabio's overall net operating income of $15,000.

Fabio Corporation Is Considering Eliminating a Department That Has a Contribution