North Division has the following information: $$\begin{array} { l r }
\text { Sales } & \$ 1,200,000 \
\text { Variable expenses } & 640,000 \
\text { Fixed expenses } & 620,000
\end{array}$$ 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

North Division has the following information: $$\begin{array} { l r } 
\text { Sales } & \$ 1,200,000 \
\text { Variable expenses } & 640,000 \
\text { Fixed expenses } & 620,000
\end{array}$$ 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?

Quizplus · Accepted Answer

The incremental effect on net income if the division is dropped is a $560,000 decrease. This is calculated as the contribution margin (Sales - Variable expenses = $1,200,000 - $640,000 = $560,000) that would be lost if the division is eliminated, as the fixed expenses will still be incurred by other divisions.