Consider the following portion of a segmented income statement for the year just ended. Assume that the fixed expenses of Division X include $30,000 of direct expenses and that the discontinuance of the department will not affect the sales of the other departments nor reduce the common expenses. $\begin{array}{lr}&\text { Division } X\
\text { Sales } & \$ 100,000 \
\text { Variable manufacturing costs } & 60,000 \
\text { Gross profit } & \$ 40,000 \
\text { Fixed expenses (direct and allocated) } & 50,000 \
\text { Operating income (loss) } & \$(10,000)
\end{array}$
What would be the effect on the firm's operating income if Division X were discontinued?
A)increase $10,000
B)decrease $40,000
C)decrease $100,000
D)decrease $10,000

Question

Quizplus · Accepted Answer

Discontinuing Division X would eliminate its $40,000 gross profit (sales minus variable costs), but it would also eliminate its $30,000 direct fixed expenses. The net effect is a decrease in operating income of $10,000, which is the current operating loss of Division X. The allocated fixed expenses would presumably remain, as they are not directly tied to Division X's operations.

Consider the Following Portion of a Segmented Income Statement for the Year