A segment has the following data: $$\begin{array} { l r }
\text { Sales } & \$ 700,000 \
\text { Variable expenses } & 300,000 \
\text { Fixed expenses } & 550,000
\end{array}$$ What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?

Question

A segment has the following data: $$\begin{array} { l r } 
\text { Sales } & \$ 700,000 \
\text { Variable expenses } & 300,000 \
\text { Fixed expenses } & 550,000
\end{array}$$ What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?

Quizplus · Accepted Answer

If the segment is eliminated, the company will lose the contribution margin of $400,000 (Sales $700,000 - Variable expenses $300,000). The fixed expenses will still be incurred as they are allocated to other segments, so the net income will decrease by $400,000.