Freemen Company's western territory's forecasted income statement for the upcoming year is as follows:
$$\begin{array} { | l | r | }
\hline \text { Sales } & \$ 800,000 \
\hline \text { Variable expenses } & \underline { 500,000 } \
\hline \text { Contribution margin } & \$ 300,000 \
\hline \text { Fixed expenses } & \underline { 396,000 } \
\hline \text { Operating income } & ( \$ 96,000 ) \
\hline
\end{array}$$ Freemen Company's management is considering dropping the western territory. This move would be financially advantageous only if the company could eliminate $96,000 of fixed costs or more.

Question

Freemen Company's western territory's forecasted income statement for the upcoming year is as follows:
 $$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 800,000 \
\hline \text { Variable expenses } & \underline { 500,000 } \
\hline \text { Contribution margin } & \$ 300,000 \
\hline \text { Fixed expenses } & \underline { 396,000 } \
\hline \text { Operating income } & ( \$ 96,000 ) \
\hline
\end{array}$$ Freemen Company's management is considering dropping the western territory. This move would be financially advantageous only if the company could eliminate $96,000 of fixed costs or more.

Quizplus · Accepted Answer

If the western territory is dropped, the company would lose the contribution margin of $300,000. To avoid a decrease in overall operating income, at least $96,000 of fixed costs must be eliminated to offset the negative operating income of $96,000.

Freemen Company's Western Territory's Forecasted Income Statement for the Upcoming