North Division has the following information: $\begin{array}{lr}
\text { Sales } & \$ 1,200,000 \
\text { Variable expenses } & 640,000 \
\text { Fixed expenses } & 620,000
\end{array}$ If this division is eliminated, the fixed expenses will be allocated to the company's other divisions.What is the incremental effect on net income if the division is dropped?

Question

Quizplus · Accepted Answer

The incremental effect on net income if the division is dropped is a $560,000 decrease. This is calculated by subtracting the variable expenses from sales to find the contribution margin ($1,200,000 - $640,000 = $560,000). Since the fixed expenses will be reallocated and not eliminated, the net income will decrease by the contribution margin amount.