Wightman Industries has two sales territories-East and West.Financial information for the two territories is presented below:

East West

Sales $980,000 $750,000

Direct costs:

Variable (343,000) (225,000)

Fixed (450,000) (325,000)

Allocated common costs (275,000) (175,000)

Net income (loss) $(88,000) $ 25,000

Because the company is in a start-up stage,corporate management feels that the East sales territory is creating too much of a cash drain on the company and it should be eliminated.If the East territory is discontinued,one sales manager (whose salary is $40,000 per year)will be relocated to the West territory.By how much would Wightman's income change if the East territory is eliminated? A)increase by $88,000 B)increase by $48,000 C)decrease by $267,000 D)decrease by $227,000

Question

Wightman Industries has two sales territories-East and West.Financial information for the two territories is presented below:

	East	West
Sales	$980,000	$750,000
Direct costs:
Variable	(343,000)	(225,000)
Fixed	(450,000)	(325,000)
Allocated common costs	(275,000)	(175,000)
Net income (loss)	$(88,000)	$ 25,000

Because the company is in a start-up stage,corporate management feels that the East sales territory is creating too much of a cash drain on the company and it should be eliminated.If the East territory is discontinued,one sales manager (whose salary is $40,000 per year)will be relocated to the West territory.By how much would Wightman's income change if the East territory is eliminated? A)increase by $88,000 B)increase by $48,000 C)decrease by $267,000 D)decrease by $227,000

Quizplus · Accepted Answer

If East territory is eliminated, net sales would decrease by $600,000 and contribution margin would decrease by $333,000 ($880,000 - $547,000). However, salary expenses would decrease by $40,000, resulting in a decrease in operating expenses. 
Therefore, the net income would decrease by ($333,000 - $40,000) = $293,000. 
Thus, Wightman's income would decrease by $227,000 if the East territory is eliminated.

Wightman Industries Has Two Sales Territories-East and West