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 by subtracting the variable expenses ($640,000) from the sales ($1,200,000), resulting in a contribution margin of $560,000. Since the fixed expenses will be allocated to other divisions, the net income will decrease by the contribution margin amount.