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

To determine the effect of dropping the Talbot division, we need to calculate the contribution margin of that division and subtract it from the total company's contribution margin.

Contribution margin for Talbot: 
$480,000 - $240,000 - $80,000 - $20,000 = $140,000

Contribution margin for Heather: 
$720,000 - $360,000 - $120,000 - $30,000 = $210,000

Total company contribution margin: $350,000

If Talbot is dropped, the total company contribution margin would decrease to $210,000.

Subtracting the fixed costs of $289,000 from the new contribution margin, we get:

$210,000 - $289,000 = -$79,000

Therefore, the company would incur a loss of $79,000 if the Talbot division is dropped. So, the correct answer is B.