Overland Company is planning on discontinuing one of its markets in Japan. The Japanese market has a contribution margin of $33,000. Fixed costs for the Japanese market are $55,000, 70% of which are unavoidable. What will be the effect on Overland's net income if the Japanese market is eliminated?

Question

Quizplus · Accepted Answer

If the Japanese market is eliminated, the fixed cost that is unavoidable will continue to exist at 70% of the current cost, which is $38,500 ($55,000 * 0.7).

The contribution margin that will no longer exist is $33,000.

Therefore, the net income will decrease by ($33,000 - $38,500) = -$5,500.

So, the correct answer is D, Decrease by $16,500 (since the question asks for the effect on net income, which is the opposite of the contribution margin).

Overland Company Is Planning on Discontinuing One of Its Markets